EM catch-up to slow as globalisation stalls - Capital Economics
Global Economics

EM catch-up to slow as globalisation stalls

Long-term Global Economic Outlook
Written by Global Economics Team
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We expect most of the 2020s to be characterised by slow growth and very low inflation as persistently weak productivity growth leaves the developed world looking distinctly Japanese. But technological developments should ultimately bear fruit and we forecast that a pick-up in output per worker from late in the decade will help offset the decline in working age populations, keeping global growth close to 3%. Growth in emerging economies will continue to outpace that in the developed world, but not to the extent seen in the recent past. The process of reform and market liberalisation has stalled in many large EMs and some of the previous gains from opening up to international trade could be lost as the current wave of globalisation ends.

  • We expect most of the 2020s to be characterised by slow growth and very low inflation as persistently weak productivity growth leaves the developed world looking distinctly Japanese. But technological developments should ultimately bear fruit and we forecast that a pick-up in output per worker from late in the decade will help offset the decline in working age populations, keeping global growth close to 3%. Growth in emerging economies will continue to outpace that in the developed world, but not to the extent seen in the recent past. The process of reform and market liberalisation has stalled in many large EMs and some of the previous gains from opening up to international trade could be lost as the current wave of globalisation ends.
  • Table of Main Forecasts
  • Global Themes – In this edition, we explore the effects of deglobalisation and climate change.
  • World in 2050 – The US will be richer compared to other advanced economies and most EMs will close only a fraction of the income gap. Public debt will typically be higher, but with little impact on real rates.
  • In the US, stagnation will eventually give way to resurgence as the flexible economy benefits more than others from technological change. Japan’s growth will slow to a snail’s pace as the population shrinks.
  • Germany also faces a demographic challenge, but it is well placed to adopt new technologies. France will continue to suffer the effects of a rigid labour market, although reforms should boost productivity growth a little. Italy’s outlook is dire and default seems inevitable.
  • Brexit will damage potential growth in the UK, but by less than most forecasters assume.
  • Canada will be one of the few to benefit from rising temperatures and its investment in research and development bodes well. Australia will outperform other advanced economies amid strong immigration.
  • China will move from growth star to middle-of-the-road EM as demographics turn against it and the state continues to misallocate resources.
  • India will be a global outperformer, with strong population growth complemented by a reform drive. Deglobalisation will dent growth in Other Emerging Asia but Vietnam will be a bright spot.
  • In Emerging Europe, Russia will be the worst performing major EM due to its poor business environment.
  • Latin America will underperform in the long run amid recurrent currency crises, rising temperatures and reshoring of production to advanced economies including the US.
  • Most of the Middle East & North Africa will struggle to diversify away from oil production. Incomes in Sub-Saharan Africa will fall yet further behind given weak institutions and the adverse effects of climate change.
  • The key trend in Commodities will be a steady decline in the price of oil price as demand weakens.
  • Ten Risks to the Global Outlook – We are most worried about corporate debt, particularly in China.
  • Rankings – China is unlikely to overtake the US as the world’s largest economy by 2050. Italy will lose its place in the top 10. But India and Indonesia will surge up the global rankings.
  • Detailed Forecast Tables

Main Forecasts

Table 1: Real GDP (% Annual Change)

World

Share (2018)

Average

Forecasts, Average

PPP Ex. Rates

Market Ex. Rates

2006-2010

2011-2015

2016-2020

2021-2025

2026-2030

2031-2050

World (1)

100

100

3.6

3.3

3.1

2.9

2.9

2.9

Advanced Economies

US

15.2

24.8

0.9

2.2

2.3

2.0

2.2

2.4

Japan

4.1

6.0

0.1

1.0

0.8

0.5

0.6

0.6

Euro-zone

11.7

15.4

0.8

0.8

1.6

1.1

1.0

1.1

– Germany

3.2

4.5

1.2

1.8

1.3

1.1

1.3

1.5

– France

2.2

3.1

0.8

1.0

1.4

1.2

1.2

1.6

– Italy

1.8

2.3

-0.3

-0.7

0.8

0.1

0.0

0.7

– Spain

1.4

1.6

1.0

0.0

2.3

1.1

1.3

1.4

UK

2.2

3.2

0.5

2.0

1.5

1.5

1.6

1.7

Canada

1.4

2.0

1.2

2.2

1.9

1.8

1.4

2.3

Australia

1.0

1.6

2.8

2.8

2.3

2.5

2.5

2.7

Emerging Asia

China (1)

18.7

16.3

10.7

6.3

5.2

3.6

3.2

2.2

India

7.8

3.4

8.3

6.5

6.7

6.9

6.0

5.2

Indonesia

2.6

1.3

6.1

5.5

5.0

4.7

4.7

4.4

S. Korea

1.6

1.9

4.1

3.0

2.5

2.3

2.0

1.9

Thailand

1.0

0.6

3.8

3.0

3.3

2.6

2.5

2.5

Philippines

0.7

0.4

5.0

5.9

6.3

6.2

5.7

5.5

Emerging Europe

Russia

3.1

1.9

3.7

1.4

1.2

1.4

1.6

1.3

Turkey

1.7

0.9

3.4

7.1

3.5

3.1

2.4

3.4

Poland

0.9

0.7

4.8

3.0

4.1

2.5

2.3

2.0

Czech Republic

0.3

0.3

2.5

1.7

2.9

2.5

2.4

2.0

Latin America

Brazil

2.5

2.1

4.5

1.2

0.4

2.2

2.1

1.8

Mexico

1.9

1.5

1.6

3.0

1.7

2.5

2.2

1.9

Argentina

0.7

0.5

5.1

1.5

-0.9

2.1

2.3

1.7

Colombia

0.6

0.4

4.5

4.7

2.3

2.3

2.0

1.4

MENA

Saudi Arabia

1.4

0.9

2.8

5.2

1.1

1.8

2.3

2.2

Egypt

1.0

0.3

6.1

3.9

5.1

4.9

5.6

6.0

UAE

0.5

0.5

2.5

5.2

1.9

2.5

2.9

2.4

Morocco

0.2

0.1

5.0

4.0

2.9

3.6

5.1

5.6

Sub-Saharan Africa

Nigeria

0.9

0.5

8.2

4.8

1.1

3.1

4.7

5.2

South Africa

0.6

0.4

3.1

2.2

0.7

1.7

1.9

2.0

Angola

0.1

0.1

8.5

4.5

-0.8

2.3

-2.2

0.5

Kenya

0.1

0.1

5.0

5.5

5.8

5.6

5.5

5.0

Sources: Refinitiv, Capital Economics

(1) We use our own China Activity Proxy (CAP)-derived GDP estimates for China for world aggregates.


Summary

  • We expect most of this decade to be characterised by slow growth and very low inflation. Population ageing will continue to incentivise saving while a hangover from the financial crisis prevents the financial system from fully supporting investment. Given the low level of neutral real interest rates, central banks in advanced economies will struggle to offer any meaningful policy stimulus.
  • But there is light at the end of the tunnel. It is normal for technological advances to take many years to feed through to stronger productivity growth and we suspect that the latest wave will eventually bear fruit. The US is likely to be at the forefront of this change given its business-friendly environment and highly educated workforce. Since its demographic outlook is not as challenging as most other developed economies’, it will keep its place at the top of the economic rankings.
  • While the euro-zone will also see some improvement in productivity growth in the long run, rigid labour markets and red tape will limit the gains from technological change. Moreover, the decline in the size of the workforce will weigh heavily on growth as populations age. We think that the resulting pressure on public finances, combined with persistently weak productivity growth, must ultimately force Italy to restructure its public debt. Few other forecasters anticipate this, let alone the associated significant risk of a euro-zone exit.
  • Inflation will stay very low among the advanced economies as the relationship between economic conditions and price pressures remains weak. Nowhere will this trend be more prominent than in Japan, where extensive policy loosening has failed to boost inflation expectations and policymakers have few tricks left to try.
  • Growth in emerging economies will continue to outpace that in the developed world, but not to the extent seen in the past two decades. The process of reform and market liberalisation has stalled in many large emerging markets, including in China. There, policy will probably continue to favour tightening political control and cementing the economic role of the state. The resulting misallocation of resources will hinder productivity. Meanwhile, demographic trends will become far less favourable.
  • Elsewhere, there are no major EMs left to integrate into the global economy. And the smaller ones, such as those in Africa, lack the institutions and desire to reform which would be needed for them to become major players. If anything, the risk is that some of the previous gains from opening up to international trade are lost as the current wave of globalisation stalls or goes into reverse. This is likely to hit the economies of Emerging Asia hardest.
  • Some EMs will continue to do very well, including India. Workforce gains there will be much stronger than elsewhere reflecting healthy population growth and a rise in female participation. Meanwhile, pressure from businesses and investors will continue to encourage productivity-boosting reforms. Indonesia and the Philippines will also grow strongly. On the whole, though, catch-up will be slower and much less widespread than it has been in the past few decades. For many, climate change will be an extra headwind.
  • Finally, we forecast that the price of oil will fall sharply in real terms by 2050. Oil consumption is likely to peak in the 2030s and fall thereafter due to the rising use of electronic vehicles, subdued global demand growth and concerns about the impact of fossil fuel use on climate change. At the same time, plentiful oil reserves mean that supply should be ample.

Key Themes

Technological advances to boost productivity growth

  • Aggregate GDP growth of the world economy looks set to remain sluggish at around 3% in the coming decades. (See Chart 1.) But this flat profile masks contrasting fortunes of GDP growth in developed (DMs) and emerging economies (EMs).
  • Indeed, we expect there to be a productivity-driven pick-up in GDP growth in developed economies, while growth in EMs should decelerate. (See Chart 2.) So, although in levels terms GDP in emerging economies will continue to converge with DMs, it will do so at a slower rate than recently.
  • There are two aspects to our view that productivity growth in developed economies will pick up. The first is that the potential productivity gains from the ICT advances in the past couple of decades have still not been fully exploited. The second is that we are likely to see another wave of advances linked to artificial intelligence and robotics. It is hard to say exactly when this will happen, but we have forecast a pick-up in productivity growth from 2025 onwards.
  • That said, while the computer revolution has been positive for economic growth, it also means that technological risks must be added to the threats facing the global economy. While the economic impact of the internet “going down” for a few days would be very small, a prolonged attack on key infrastructure would be much more damaging.
  • And EMs are unlikely to share in the pick-up in productivity growth. (See Chart 3.) The poorest countries will remain held back by a range of structural problems, while scope for catch-up among major EMs is now limited.
  • Signs that globalisation has peaked are not good news for EMs either. As Chart 4 shows, global trade of goods and services has flattened off as a share of GDP. (See Chart 4.)

Chart 1: Global Real GDP (% y/y)

Chart 2: Real GDP (% y/y)

Chart 3: Productivity Growth (% y/y)

Chart 4: World Exports of Goods & Services
(As a % of GDP)

Sources: Refinitiv, WTO, Capital Economics

Key Themes

Policy-driven deglobalisation looking increasingly likely

  • This does not have to be bad news for all economies. For example, advanced manufacturing techniques mean that it might become cheaper for some advanced economies to “reshore” activity. While that would reduce trade volumes compared to otherwise, it would not reduce productivity or consumer choice.
  • That said, given that the most common development path begins with labour-intensive manufacturing in sectors such as textiles, life for the poorest countries would become more difficult.
  • What’s more, a more malign form of policy-driven de-globalisation – where cross-border trade and capital flows fall as a share of GDP – is looking increasingly likely.
  • In most scenarios, the effects of this for the world would be negative, but manageable. (See Chart 5.) For example, a global trade war – in which all countries imposed across the board 25% tariffs – would leave the world economy about 5% smaller than it would otherwise have been by 2030. (See Chart 6.)
  • However, a deep split between China- and US-led economic blocs would be more concerning. We think that the cause of the rift between China and the US is the speed of China’s emergence as a geopolitical and economic competitor to the US (see Chart 7) rather than the personality of Donald Trump.
  • Talk of another Cold War is a bit extreme, given that China is tightly integrated into the world economy in a way that the Soviet Union never was. (See Chart 8.) Nonetheless, we could see global supply chains splinter and technology transfer seize up. As an economy that is still catching up, and which appears likely to double down on a state-led economic approach if tensions rise further, China would have more to lose from this.
Chart 5: Globalisation Scenarios – Economic Effects

Chart 6: World GDP Secenarios (2020 = 100)

Chart 7: Share of Global GDP (%)

Chart 8: Goods Exports Plus Imports
(As a % of Global GDP)

Sources: IMF, World Bank, Capital Economics

Key Themes

Green growth doesn’t have to mean slower growth

  • Factoring climate change into our forecasts is difficult given that it is an area of huge uncertainty. As things stand, though, it seems unlikely that the world will do enough to bring about the very sharp reduction in carbon emissions that most scientists think is required to prevent a meaningful further rise in average temperatures. (See Chart 9.) Most notably, a sharp fall in emissions in China does not look likely since it would require a downsizing in state-owned industry that the Party leadership is unlikely to consider. (See Chart 10.)
  • Countries in Africa and South and Southeast Asia are set to be worst, and most quickly, affected by global warming. (See Chart 11.) What’s more, these relatively poor countries have few resources to spend on adapting to these changes.
  • It is only beyond 2050 that temperatures have the potential to rise enough for the effects to have a big direct impact on the GDP of the world’s largest economies, and therefore at a global level. Nonetheless, they might be indirectly affected by the impact of global warming on developing economies – via more volatile food prices or large migration inflows.
  • The most immediate issue for these large economies, though, is the effect of measures to prevent global warming. There are widespread fears that these will take a toll on economic growth, but we think that these worries are overdone. Improvements in technology in recent years have pulled down the cost of renewable energy. And in the long run, the application of new green technology to other sectors could bring productivity gains.
  • The circled period in Chart 12 shows that the growth of emissions has already slowed without prompting economic growth to slow (although part of this might reflect weakness in Chinese industry.) Green growth does not have to mean slower growth. (See Chart 12.)

Chart 9: Global Mean Temperature Increase by 2100 (°C, From Pre-Industrial Average)

Chart 10: Carbon Emissions By Country (trn tonnes)

Chart 11: Effect on GDP of 3°C Rise in Global Temp. From Current Temperatures by 2100 (%)

Chart 12: World GDP & Carbon Emissions (% y/y)

Sources: Climate Change Tracker, BP, World Bank


The World in 2050

  • Our long-term projections for real global GDP growth of a little under 3% per year on average imply that the world economy will have expanded by 140% by 2050. Aggregate GDP will increase by around 70% in advanced economies and by over 190% in emerging economies (EMs). (See Charts 13 & 14.)
  • Accordingly, EMs will account for almost 60% of the world economy by 2050 at market exchange rates, compared to 44% now. India will see its share of world GDP more than triple from 3% to 10%. And Indonesia is on track to become the world’s fifth largest economy, up from its current rank of 16th. But, unlike many forecasters, we do not expect China to steal the position of world’s largest economy from the US. Indeed, our expectation of slower productivity growth and a declining workforce implies that China will not increase its share of world GDP at all. (See Charts 15 & 16.)
  • The euro-zone’s share of world GDP will decline markedly, largely owing to poor demographics and rigid labour markets. By 2050, the region will make up just 9% of the world economy, making it less important than India and little more than half the size of China in terms of GDP at market exchange rates. The rising importance of EMs in the world economy will be due largely to stronger working-age population growth. Indeed, EMs will make up 90% of the world’s workforce by 2050, compared to about 80% now. (See Chart 17.)
  • The US is likely to keep its top position among major economies in GDP per capita terms. Indeed, we still forecast that the gap between the US and most other advanced economies will widen on this measure. Among them, we expect Italy and Japan to fall furthest behind, with per capita incomes of just 38% and 54% of the US level respectively by 2050, compared to 56% and 62% in 2018. (See Chart 18.)
  • Per capita incomes in EMs should continue to rise towards those in the DMs, but at a far slower pace than they have in the recent past. Even in India – our star performer – it will end the forecast period at only 11% of the US level. China’s per capita GDP will still be little more than a third of that in the US. And some EMs, including Brazil and South Africa, are unlikely to close the gap at all. The poorest economies will still be those in Sub-Saharan Africa, with per capita GDP in Angola, for example, languishing at a mere 1% of that in the US.
  • Population ageing will result in a widespread increase in dependency ratios. (See Chart 19.) The change will be most marked in Japan and Italy. Structural reforms in Japan are helping to ease the strain on the public finances. In any case, high levels of public debt are manageable there. But Italy is in a worse position and, without its own central bank to finance the government, it will ultimately be forced to default. By 2050, its public debt will therefore be much lower than it is now, and we suspect that borrowing costs will have fallen and growth will be stronger as a result.
  • Ageing populations should also put some upward pressure on interest rates. Older people tend to save less than those of working-age, so ageing should cause savings to fall and interest rates to rise. However, without a marked rise in investment, interest rates are still set to remain low by the standards of previous decades.
  • Inflation will still be very low among the advanced economies thanks to credible inflation targeting, the weakness of trade unions and technological change. EMs will turn increasingly towards central bank independence and inflation targeting, allowing inflation there to decline too. We also expect the dispersion of inflation rates among the EMs to diminish over time. (See Chart 20.)

Charts

Chart 13: World Real GDP
(% y/y, 2018 PPP-weighted)

Chart 14: DM & EM Real GDP
(% y/y, 2018 PPP-weighted)

Chart 15: % Shares of World GDP in 2018
(Market exchange rates)

Chart 16: % Shares of World GDP in 2050
(Market exchange rates)

Chart 17: Shares of Global Working-age Population

Chart 18: Real GDP Per Capita % of US (2018 PPP e/r.)

Chart 19: Old-age Dependency Ratios (%)

Chart 20: Regional CPI Inflation (%, 2018 PPP-weighted)

Sources: Refinitiv, United Nations, Capital Economics


United States

Stagnation will eventually give way to technology-driven resurgence

  • We expect the current combination of underwhelming trend economic growth, low inflation and low interest rates to persist for much of the next decade. But eventually a technology-led resurgence in productivity growth should boost the economy’s potential growth rate and the equilibrium interest rate. After averaging 2.1% over the next decade, matching the performance over the last decade, we then see GDP growth picking up to 2.6% in the 2030s and beyond. (See Chart 21.)
  • New technologies like driverless vehicles and artificial intelligence are expected to boost productivity growth from an average of slightly less than 1.5% per year in recent years to more than 2.0% in the 2030s. The US is particularly well-placed to implement and adapt to new technologies given its business-friendly environment and highly educated workforce.
  • Although the retirement of the baby boomers is already well underway, it will continue to act as a drag on the labour force for at least another couple of decades. In 2019, there were still 2.3 prime-aged people to every one person aged over 60, but that ratio will fall to 1.9 by 2030 and 1.8 by 2050. That matters crucially for the overall participation rate because the prime-age population has a participation rate of close to 80%, whereas that rate drops to nearer 40% for those aged over 60.
  • The upshot is that even if those aged above 60 worked more, the overall participation rate would still trend sharply lower. If the recent curbs on immigration were sustained, then that would put even more downward pressure on labour force growth.
  • Our forecasts for GDP growth do not assume any significant drag from policies to combat climate change because current projections suggest the US will fail to curb its GHG emissions significantly. (See Chart 22.) The US has been moderately successful in reducing CO2 emissions over the past decade, largely by generating more of its electricity from natural gas and less from coal. But the EIA’s forecasts suggest those emissions will remain broadly stable over the next few decades. The EIA does assume that the US adopts renewable sources for electricity generation and reduces its reliance on gasoline in transportation, but those effects are countered by population growth.
  • Climate change could reduce agricultural production in California and Florida, but only modestly, while higher average temperatures further north in the country would be a positive. More generally, high income levels in the US mean it would be more insulated than others from a spike in global food prices.
  • As the economy’s potential growth rate eventually edges higher, the neutral fed funds rate should rebound too. We assume it recovers to 3.0% in the 2030s, up from as low as 2.0% now. (See Chart 23.) Our forecasts show the 10-year Treasury yield rising back to an average of 4.0%, but that rather sanguine view assumes that bond markets are unperturbed by a rise in the Federal debt burden to well above 100% of GDP. (See Chart 24.)
  • Finally, our projections assume that the inflation rate remains close to 2% throughout the forecast period, but there are substantial risks on both sides. On the downside, with Japan and now the euro-zone succumbing to a low growth and low inflation environment, the US could follow. On the upside, however, the Fed is less focused on inflation, government deficits have soared, and globalisation may be going into a partial reverse. Those elements could eventually lead to much higher inflation.

United States Charts

Chart 21: Real GDP (%y/y)

Chart 22: CO2 Emissions (Million Tonnes)

Chart 23: Interest Rates

Chart 24: Federal Debt (As a % of GDP)

Sources: Refinitiv, EAI, Capital Economics

Key Forecasts (% y/y, Averages, unless otherwise stated)

2006-2010

2011-2015

2016-2020

2021-2025

2026-2030

2031-2050

Real GDP

0.9

2.2

2.3

2.0

2.2

2.4

Real consumption

1.1

2.3

2.72.12.2

2.4

Productivity

1.30.80.91.41.82.0

Employment

-0.41.41.40.60.30.4

Unemployment rate (%, end of period)

9.6

5.3

3.6

4.04.04.0

Wages

2.6

2.13.12.83.13.3

Inflation (%)

2.21.7

1.9

1.91.71.9

Policy interest rate (%, end of period) (1)

0.30.5

1.8

2.0

2.8

4.0

Ten-year government bond yield (%, end of period) (2)

3.32.31.82.02.84.0

Government budget balance (% of GDP, average over period)

-4.9-4.9-3.9-4.5-4.7-7.1

Net federal debt (% of GDP, average over period)

4470788294119

Current account (% of GDP, average over period)

4.2-2.4-2.3-2.2-2.1-2.2

Exchange rate (US dollar per euro, end of period)

1.341.091.051.111.161.25

Nominal GDP ($bn, end of period)

14,99218,22520,51227,01232,79775,179

Population (millions, end of period)

309321331343355390

Sources: Refinitiv, Capital Economics


Japan

Economy to languish as population shrinks

  • Even though we expect productivity growth to rebound, the trend rate of economic growth is likely to slow to around 0.5% over the next decade. This is because the labour force is likely to start to shrink again. Meanwhile, we expect inflation to remain very subdued.
  • The participation rate has risen sharply in recent years as more women have entered the labour market and older people have remained in paid employment for longer. We think it will rise a bit further over the next few years before falling again as the share of the population aged 85+ doubles from 5% now to nearly 10% by 2030. (See Chart 25.)
  • We expect net migration to remain around its current level of 200,000 for the foreseeable future due to more liberal immigration rules. (See Chart 26.) But that won’t offset the continued decline in the domestic working-age population. We expect the labour force and employment to rise by another 1% by 2023 but then fall by around 15% by the end of our forecast horizon.
  • Our forecasts assume that productivity growth rebounds to 1% by the mid-2020s, from an average of just 0.3% over the past decade. Japan should continue to benefit from a highly educated workforce and high spending on research and development. However, there are signs that the country’s capacity to innovate has declined, so any rebound in productivity growth may be smaller than in other major advanced economies.
  • All told, we expect average GDP growth to slow to around 0.5% per year over the next three decades, down from the 1% rates seen in recent years. (See Chart 27.)
  • The economy is currently facing the most severe capacity shortages in a decade. We assume that these capacity shortages will disappear over the next couple of years, which means that the unemployment rate would settle around 3%.
  • Aggressive monetary easing hasn’t lifted inflation expectations much over the past couple of years and the relationship between inflation and the economic cycle remains extremely weak. (See Chart 28.) So, even as spare capacity vanishes, inflation looks set to hover around 0.5% in the 30 years ahead.
  • This, in turn, suggests that the Bank of Japan will keep its policy rate around its current level
    of -0.1% for the foreseeable future. However, we suspect that mounting concerns about the impact of prolonged monetary easing on financial stability will convince the Bank to lift its target for 10-year government bond yields to 0.5% over the coming decade.
  • Following the sales tax hike in 2019, Japan’s structural government budget deficit should come under control in the near term. But some of the recent improvement in the budget position reflects cyclical factors which may not last. Adding mounting costs from pension and health spending, we expect the budget deficit to widen to around 4% of GDP by end-2050.
  • For the next decade or so, the ratio of public debt to GDP should be broadly stable. But the widening deficit will cause it to rise again towards the end of our forecast horizon. As the Bank of Japan should be able to keep a lid on government bond yields, this shouldn’t cause a debt crisis.

Japan Charts

Chart 25: Labour Force Participation Rate (as % of population aged 15+)

Chart 26: Annual Change in Population (‘000)

Chart 27: Employment, Productivity & GDP (% y/y)

Chart 28: Output Gap & Inflation (%)

Sources: Refinitiv, OECD, United Nations, BoJ, Capital Economics

Key Forecasts (% y/y, Averages, unless otherwise stated)

2006-2010

2011-2015

2016-2020

2021-2025

2026-2030

2031-2050

Real GDP

0.1

1.0

0.8

0.5

0.6

0.6

Real consumption

0.5

0.6

0.4

0.6

0.7

0.6

Productivity

0.3

0.7

-0.3

0.4

1.0

1.5

Employment

-0.2

0.3

1.1

0.1

-0.4

-0.9

Unemployment rate (%, end of period)

4.4

3.0

2.6

2.7

3.2

3.5

Wages

-0.8

-1.0

0.6

0.4

0.9

1.5

Inflation (%)

-0.3

-0.2

0.9

0.5

0.5

0.5

Policy interest rate (%, end of period) (1)

0.1

0.1

-0.1

0.0

0.0

0.0

Ten-year government bond yield (%, end of period) (2)

1.1

0.3

0.0

0.1

0.4

0.5

Government budget balance (% of GDP, average over period)

-6.0

-8.5

-4.6

-2.4

-2.5

-3.4

Gross government debt (% of GDP, average over period)

163

209

235

239

248

268

Current account (% of GDP, average over period)

3.3

2.5

2.7

2.9

2.3

1.8

Exchange rate (Japanese yen per US dollar, end of period)

82

120

110

102

86

58

Nominal GDP ($bn, end of period)

6,140

4,413

5,057

5,589

6,817

11,519

Population (millions, end of period)

128

127

127

125

123

111

Sources: Refinitiv, Capital Economics


Germany

Demographic challenge partly offset by technological boost

  • A shrinking working-age population, soft household spending and weak investment will weigh on German economic growth, meaning it is unlikely to match the pace of the US. But relatively high migration coupled with faster adoption of new technologies should ensure that it outperforms the euro-zone overall.
  • The population aged 15 to 65 is set to start falling in the next few years as more baby boomers reach retirement. (See Chart 29.) The retirement age is already above that elsewhere, at 67 years, but we expect pressures on the pension system to prompt further increases in the future, perhaps to the Bundesbank’s recommended 69 years.
  • The demographic challenge has been alleviated by an influx of migrants, who are younger on average and have a higher birth rate than the domestic population. We suspect that plans to limit immigration will be hard to enforce and see it boosting population growth.
  • Migrant workers have been difficult to integrate into the labour force so far due to language difficulties and lower educational levels. But these should ease over time, helped by government spending on refugee training. In all, we think the workforce will fall by 0.1% per year, on average, until 2030 and 0.2% over the following twenty years.
  • Productivity growth should rise only gradually but still outpace that elsewhere in the euro-zone, reflecting the relatively skilled workforce and previous labour market reforms. Germany’s openness to trade means it is well placed to adopt technological advances from elsewhere. We expect the auto sector to thrive as the world shifts towards electric vehicles.
  • Nonetheless, relatively low levels of consumer spending and investment will mean that Germany continues to underperform the US.
  • The relationship between unemployment and wages has been weak for the past twenty years. (See Chart 30.) With little prospect of an end to pay restraint, we think inflation will probably average well below 2%.
  • Soft household spending will in turn discourage private sector investment, and public investment will remain weak as the government focuses its spending on pensions. Even if the next federal election in 2021 results in a change of government, we doubt that public investment will rise significantly. Admittedly, the Greens – who want to relax the debt brake (which limits public borrowing) – have gained in the polls recently. But without support from other parties, fiscal policy is likely to remain quite restrictive.
  • The upshot is that we forecast average productivity growth of around 1.4% in the next thirty years, up from 0.9% in the past five. (See Chart 31.) This will offset part of the drag from the declining workforce, meaning that trend GDP growth is set to slow from about 1.5% now to 1.3% in the 2030s.
  • Official interest rates should rise towards a still-low 1% over the next decade (see Chart 32), reflecting subdued trend growth, a lack of inflationary pressure and a preference for savings. The spread between 10-year Bund yields and official rates will remain smaller than in the US due to low public debt. But we see a rise in the term premium lifting ten-year yields to 2% by the mid-20s.
  • It seems highly unlikely that the German government will accept meaningful transfers to struggling euro-zone economies. As a result, Germany’s excessive savings will ultimately be used to finance spending in the periphery again. If so, the associated imbalances will keep the threats of a renewed credit crunch or euro-zone break-up very much alive.

Germany Charts

Chart 29: Population Aged 15 to 64 (% y/y)

Chart 30: Germany Phillips Curve

Chart 31: Employment, Productivity & GDP (% y/y)

Chart 32: ECB Interest Rates (%)

Sources: Refinitiv, United Nations, Capital Economics

Key Forecasts (% y/y, Averages, unless otherwise stated)

2006-2010

2011-2015

2016-2020

2021-2025

2026-2030

2031-2050

Real GDP

1.2

1.8

1.3

1.1

1.3

1.5

Real consumption

0.6

1.8

1.4

1.6

1.3

1.7

Productivity

0.3

0.8

0.3

0.9

1.4

1.7

Employment

0.9

1.0

1.1

0.2

-0.1

-0.2

Unemployment rate (%, end of period)

6.4

4.3

3.1

3.5

3.4

3.3

Wages

1.8

2.4

2.5

2.7

2.9

3.1

Inflation (%)

1.6

1.5

1.3

1.4

1.5

1.5

Policy interest rate (%, end of period) (1)

1.0

0.1

0.0

0.3

1.0

1.0

Ten-year government bond yield (%, end of period) (2)

2.8

0.5

-0.5

0.5

2.0

2.0

Government budget balance (% of GDP, average over period)

-1.8

0.1

1.2

0.8

-0.7

-1.0

Gross government debt (% of GDP, average over period)

70

77

63

57

49

45

Current account (% of GDP, average over period)

6.0

7.1

7.6

6.9

5.4

6.0

Exchange rate (US dollar per euro, end of period)

1.34

1.09

1.05

1.11

1.16

1.25

Nominal GDP ($bn, end of period)

2,698

3,517

3,583

3,790

4,667

5,742

Population (millions, end of period)

82

81

83

83

84

83

Sources: Refinitiv, Capital Economics

(1) Refinancing rate, end of period; (2)Local currency, end of period


France

Economy hindered by rigid labour market despite some reform progress

  • France is likely to grow at a reasonable pace over the next 30 years. This in part reflects fairly favourable demographics, at least compared to most other major advanced economies. And while the labour market will remain relatively rigid, we suspect that ultimately enough reform progress will be made to allow productivity growth to pick up a little.
  • As in other advanced economies, France’s population is ageing. The United Nations estimates that by 2050 almost a third of the population will be over 60, up from around 25% today. The ageing process will be cushioned by the fact that France’s birth rate is the highest in the euro-zone. And we expect immigration to continue to boost the working-age population despite a hardening attitude towards migration in Europe. In all, France’s working-age population is set to start falling only in the early 2030s (see Chart 33) – around ten years later than that of Germany.
  • Employment is likely to continue to rise over the next 15 years or so as well. Since the crisis, France’s female labour force participation rate has held broadly steady, while the German and especially Japanese rates have risen. (See Chart 34.) This suggests that there is at least scope for it to increase in France in the future. Moreover, although workers in France currently retire at a younger age than in most other OECD economies (see Chart 35), demographic pressures mean that the pension age will eventually need to rise.
  • Reforms to the French labour market undertaken over the past few years have started to tackle deep-seated rigidities that have historically contributed to high structural unemployment. Our working assumption is that these reforms will bear some fruit, so we therefore expect the employment ratio to edge up. But population ageing will ultimately have an impact, with employment n likely to stop growing by the mid-2030s.
  • Productivity growth in France should pick up over the next few decades, in line with other advanced economies. Admittedly, educational attainment is lower in France than it is in Germany. But recent and planned efforts to boost training will help to counter this. Moreover, the business environment in France has improved and, while there is a risk that a populist president reverses some of the recent reforms, we suspect that there will be further progress in opening markets to competition. So, we expect productivity growth to rise from about 1% now to 1.3% by 2050, when it will account for all of GDP growth. (See Chart 36.)
  • Meanwhile, the public finances are likely to remain under pressure. The government has had to resort to giveaways to appease disgruntled voters, undercutting its deficit reduction plans. Spending on pensions and healthcare is already much higher than in many other advanced economies and, as things stand, will have to increase as the population ages. Granted, pensions reform is in the pipeline. But it faces significant opposition and is due to take effect only in 2025 at the earliest and to proceed gradually. We expect the budget to remain in deficit, so the public debt will only fall to about 85% by 2050.
  • In line with other developed market government bonds, French yields are likely to end the forecast period above their current levels but still low by historic standards. We forecast the ten-year bond yield to be 2.5% by the 2050s, which is only a touch higher than in Germany.

France Charts

Chart 33: Population Aged 15 to 64 (% y/y)

Chart 34: Female Participation Rate (15+, %)

Chart 35: Effective Retirement Age (Men, years)

Chart 36: Employment, Productivity & GDP (% y/y)

Sources: UN, Refinitiv, OECD, Capital Economics

Key Forecasts (% y/y, Averages, unless otherwise stated)

2006-2010

2011-2015

2016-2020

2021-2025

2026-2030

2031-2050

Real GDP

0.8

1.0

1.4

1.2

1.2

1.6

Real consumption

1.7

1.4

1.3

1.3

1.3

2.3

Productivity

0.4

0.6

0.6

0.7

1.1

1.4

Employment

0.4

0.4

0.8

0.5

0.2

0.2

Unemployment rate (%, end of period)

9.1

10.0

8.3

7.5

7.8

8.1

Wages

2.5

1.7

2.2

2.3

2.6

2.8

Inflation (%)

1.7

1.2

1.2

1.4

1.5

1.6

Policy interest rate (%, end of period) (1)

1.0

0.1

0.0

0.3

1.0

1.0

Ten-year government bond yield (%, end of period) (2)

3.4

1.0

-0.3

0.8

1.0

2.5

Government budget balance (% of GDP, average over period)

-4.5

-4.3

-2.9

-2.7

-2.1

-2.5

Gross government debt (% of GDP, average over period)

73.2

92.5

98.8

99.8

98.4

91.3

Current account (% of GDP, average over period)

-0.4

-0.7

-0.5

-0.4

-1.2

-3.3

Exchange rate (US dollar per euro, end of period)

1.34

1.09

1.05

1.11

1.16

1.25

Nominal GDP ($bn, end of period)

2,020

2,729

2,604

2,701

3,343

4,138

Population (millions, end of period)

62

64

65

66

67

69

Sources: Refinitiv, OECD, World Bank, Capital Economics

(1) Refinancing rate, end of period; (2) Local currency, end of period


Italy

Default seems inevitable

  • Stagnation in Italy is likely to become the “new normal”, and public debt looks set to rise unsustainably. We think that there will ultimately have to be a debt restructuring, and an exit from the currency union at some point over the next 20 years is a realistic prospect.
  • There is no easy solution to Italy’s long-term problem of structurally-weak economic growth. The demographic outlook is poor, and net inward immigration will merely soften the fall in the working-age population. (See Chart 37.)
  • Productivity growth is likely to remain slow. Admittedly, it will probably pick up a bit in the long term for the same reasons that we expect it to rise in other advanced economies. But Italy has lagged behind its European peers for a long time. Since 1999, productivity growth has averaged minus 0.3% in Italy. In the euro-zone as a whole, it has averaged plus 0.6%. We see little reason for this underperformance to end.
  • Italy has low levels of education, labour market rules are rigid, and the business environment is poor. These problems won’t be solved any time soon, even if policymaking remains less chaotic than it was under the M5S-Lega coalition. In a country where governments collapse regularly, meaningful long-term reform is difficult.
  • What’s more, Italy’s membership of the euro-zone also constrains its growth. Without being able to weaken its currency, continued rises in unit labour costs erode its competitiveness. (See Chart 38.) And monetary policy will remain too tight for several reasons. First, inflation is likely to be lower than the euro-zone average, so real interest rates will be higher in Italy. Second, credit spreads are higher too, so lower policy rates would be needed to achieve a given level of market rates. This is due to the weak economy and risks in the banking sector. While the banks are offloading their bad loans quite quickly, they are also heavily exposed to domestic public debt and their capital ratios are low by international standards.
  • As a result of all this, our forecasts show productivity growth rising to just 0.5% by the mid-2020s, much weaker than the euro-zone average. Together with our demographic projections, this implies that Italy’s GDP will start to fall in the late 2020s. (See Chart 39.)
  • With GDP falling, the population ageing, and sustained austerity unlikely, the budget deficit will widen in the medium term. This will put the debt ratio on an unsustainable path. Record low policy rates and renewed ECB QE should stop investors from panicking about debt for a few more years. But looser monetary policy can only paper over the cracks for so long. Eventually, some form of default seems likely. We assume an “orderly” restructuring in the early 2030s, taking the debt-to-GDP ratio down to 100%. (See Chart 40.)
  • Given that most Italian government debt is held by domestic investors, the losses from a default would hit the economy hard in the short term. But after the default, Italy would benefit from much lower interest rates, as well as somewhat looser fiscal policy as the government uses funds previously earmarked for servicing debt to stimulate demand.
  • Of course, default wouldn’t solve all of Italy’s problems. The population would still be ageing, and potential productivity growth weak. So we assume that the government would also raise the retirement age, thereby reducing pension spending and raising labour force participation, and implement reforms to improve the business environment. But even then, we doubt that Italy would grow as quickly as Germany.

Italy Charts

Chart 37: Working-age Population (% y/y)

Chart 38: Unit Labour Costs (Q1 1999 = 100)

Chart 39: Contributions to GDP Growth
(Percentage Points)

Chart 40: Italy’s Government Debt (% of GDP)

Sources: UN, Refinitiv, Capital Economics

Key Forecasts (% y/y, Averages, unless otherwise stated)

2006-2010

2011-2015

2016-2020

2021-2025

2026-2030

2031-2050

Real GDP

-0.3

-0.7

0.8

0.1

0.0

0.7

Real consumption

1.1

1.9

0.8

0.2

0.0

0.7

Productivity

-0.4

-0.6

0.2

0.5

0.5

1.0

Employment

0.1

0.0

0.6

-0.4

-0.5

-0.3

Unemployment rate (%, end of period)

8.3

11.9

10.5

10.5

10.6

10.4

Wages

2.8

1.4

0.8

1.4

1.5

1.8

Inflation (%)

2.0

1.6

0.8

0.8

0.9

1.4

Policy interest rate (%, end of period) (1)

1.0

0.1

0.0

0.3

1.0

1.0

Ten-year government bond yield (%, end of period) (2)

4.9

1.6

1.3

4.0

10.0

3.0

Government budget balance (% of GDP, average over period)

-3.4

-3.0

-2.3

-2.7

-4.0

-1.9

Gross government debt (% of GDP, average over period)

111

130

135

137

151

92

Current account (% of GDP, average over period)

-2.7

0.3

2.8

3.1

3.4

3.1

Exchange rate (US dollar per euro, end of period)

1.34

1.09

1.05

1.11

1.16

1.25

Nominal GDP ($bn, end of period)

1,706

2,196

1,973

1,969

2,239

2,566

Population (millions, end of period)

59

60

60

59

58

57

Sources: Refinitiv, Capital Economics

(1) Refinancing rate, end of period; (2)Local currency, end of period


UK

Brexit effect cushioned by technology-induced productivity boost

  • We suspect that the dampening effect of Brexit on the economy’s long-term rate of GDP growth will eventually be cushioned by a rise in productivity growth triggered by the digital revolution. What’s more, we doubt that a sharp rise in government debt over the next 20 to 30 years would lead to much higher gilt yields.
  • Whatever form it takes, Brexit will have a downward influence on the economy’s potential rate of GDP growth. Lower net migration will contribute to smaller increases in the size of the labour force and a rise in the barriers to trade will trim productivity growth.
  • However, those effects are unlikely to be huge. The decline in net migration from 340,000 a year before the EU referendum in 2016 to 225,000 in early 2019 suggests that much of the adjustment may already happened. Our forecasts incorporate a further easing to 190,000 a year by 2025. That would cut the annual growth of the labour force by just 0.1%.
  • Instead, the bulk of the decline in the growth of the labour force that we expect, from just under 1.0% in 2019 to 0.4% in 2030 and to 0.2% in 2050, is driven by the ageing of the population.
  • Meanwhile, our assumption that the UK will eventually negotiate a Canada-style Free Trade Agreement with the EU may be consistent with productivity growth being only 0.2% lower per year than if the UK remained in the EU.
  • And we believe that over the next 10 to 20 years the benefits to productivity growth from the digital revolution will start to emerge. The UK’s flexible labour market and progressive attitude to adopting new technology means it is well positioned. As such, we are hopeful that productivity growth will gradually rise from the average rate of 0.4% over the past five years to 1.5% between 2030 and 2050. (See Chart 41.)
  • We are not expecting climate change to materially influence overall GDP growth in the UK. Indeed, the 40% cut in emissions since 1990 hasn’t had an obvious influence on GDP growth so far. (See Chart 42.) In any case, the UK has been progressive by international standards, with current legislation requiring carbon emissions to be cut net zero by 2050. And there is a growing political consensus for an even quicker timetable to reach this goal.
  • Overall, we expect that the UK’s potential GDP growth rate will edge up from 1.5% over the next five years to around 1.7% between 2030 and 2050.
  • There is little reason to expect inflation to rise above the 2% target in the long term. If anything, the UK is more likely to succumb to inflation being stuck below 2%, as it is currently in most advanced economies.
  • As potential GDP growth rises, we expect that a rise in the policy rate towards its neutral level of about 2.5% will contribute to 10-year gilt yields rising to around 3.75%. (See Chart 43.)
  • Higher borrowing costs would contribute to a rising budget deficit and higher government debt. But the main reason why current policies imply that government debt will rise from 80% of GDP now to almost 140% in 2050 is because the ageing of the population will require much higher spending without generating higher tax receipts. (See Chart 44.)

UK Charts

Chart 41: Productivity & Labour Force (%y/y)

Chart 42: CO2 Emissions (MtCO2e)

Chart 43: Policy Rate & Ten-Year Gilt Yield (%)

Chart 44: Government Budget Balance & Debt

Sources: Refinitiv, EIA, Capital Economics

Key Forecasts* (% y/y, Averages, unless otherwise stated)

2006-2010

2011-2015

2016-2020

2021-2025

2026-2030

2031-2050

Real GDP

0.5

2.0

1.5

1.5

1.6

1.7

Real consumption

0.4

2.0

2.1

1.5

1.5

1.6

Productivity

0.2

0.6

0.4

1.1

1.1

1.5

Employment

0.3

1.4

1.1

0.4

0.4

0.2

Unemployment rate (%, end of period)

7.9

5.4

3.9

3.9

3.8

3.8

Wages

3.0

1.6

3.6

3.3

3.2

3.4

Inflation (%)

2.7

2.3

1.8

1.9

2.0

2.0

Policy interest rate (%, end of period) (1)

0.50

0.50

0.75

1.75

2.50

2.50

Ten-year government bond yield (%, end of period) (2)

3.51

1.96

1.00

2.32

3.75

3.75

Government budget balance (% of GDP, average over period)

-7.0

-4.6

-2.7

-0.9

-2.3

-6.4

Gross government debt (% of GDP, average over period)

49.1

79.3

82.9

79.4

71.1

94.3

Current account (% of GDP, average over period)

-3.3

-3.9

-4.4

-4.5

-4.9

-6.4

Exchange Rate (US dollar per pound sterling, end of period)

1.57

1.47

1.35

1.32

1.35

1.41

Nominal GDP ($bn, end of period)

2,508

2,825

2,809

3,522

4,296

9,290

Population (millions, end of period)

63

65

68

69

70

74

(Sources: UN, ONS, Refinitiv, Capital Economics

*Based on a Brexit deal being passed by 31st January 2020.


Canada

Near the lead in the technology-driven revival

  • An ageing population implies that Canada’s potential GDP growth will slow slightly in the next decade. We expect it to pick back up again in the 2030s as labour force growth rebounds and productivity growth accelerates.
  • The UN’s projections suggest that Canada’s population will rise by 21% by 2050, far outpacing most advanced economies. (See Chart 45.) The reliance on immigration to fuel this growth means that the projection for Canada is more uncertain than for other countries. But with Canada set to be one of the few countries that sees a net boost to GDP as a result of rising temperatures and with little sign of a popular backlash against immigration, the case for continued strong inflows is compelling.
  • While the population should continue to grow, it is also ageing rapidly. The proportion of the population aged over 65 is set to rise from the current 17% to 23% by 2030, before increasing more gradually to 26% by 2050. (See Chart 46.) This rapid ageing will cause labour force growth to slow from over 1.0% in 2019 to 0.2% by the end of the 2020s. Labour force growth should then pick back up slightly to average 0.4% from 2030 to 2050.
  • The negative effect of slower labour force expansion on potential GDP growth should be offset by stronger productivity. Annual growth in output per person has averaged just 0.6% in the past five years, partly due to the adjustment of the energy sector to lower oil prices and of the manufacturing sector to global competition. Those sectors will continue to face challenges, particularly given the growing pressure on Canada to reduce the carbon emissions from its oil sands industry. But new technologies centred around machine learning and artificial intelligence are now benefitting other sectors. As those technologies spread throughout the economy, we expect productivity growth to rise to an average of 1.2% in the 2020s, 1.5% in the 2030s and slightly above 2.0% in the 2040s.
  • The net result is that the ageing of the population and therefore slower labour force growth will pull Canada’s potential GDP growth down from 1.8% currently to 1.5% by 2030, before it accelerates to 2.5% over the subsequent two decades. (See Chart 47.)
  • The ageing population will put pressure on the public finances. We expect the general government deficit to widen by over 2%-points to reach 3.5% of GDP by 2040. But, given that we think that potential nominal GDP growth will be 4.5% by then, we expect the debt-to-GDP ratio to remain stable. (See Chart 48.)
  • The ageing population will also put downward pressure on household saving. A combination of larger public deficits and lower household savings means that the current account deficit is likely to widen. As that external deficit will be funded by households selling assets rather than taking on debt, and given that investing in Canada will remain relatively attractive due to stronger-than-average potential GDP growth, we don’t expect this to put material downward pressure on the exchange rate. We expect the loonie to depreciate only gradually against the US dollar in the coming decades.
  • We estimate that the neutral policy rate is currently around 2.5%. Our forecast for potential GDP growth implies that the neutral policy rate will decline to 2.25% in the next decade, before rebounding to 3.25% by the late 2030s. As the neutral policy rate increases and the government runs wider deficits, we see the 10-year bond yield rising to 4.25% by 2040.

Canada Charts

Chart 45: Change in Population (%, 2020 to 2050)

Chart 46: Share of Population Aged 65+ (%)

Chart 47: Contributions to Trend Real GDP Growth (%)

Chart 48: Government Budget Balance &
Gross Debt (% of GDP)

Sources: Refinitiv, UN, Capital Economics

Key Forecasts (% y/y, Averages, unless otherwise stated)

2006-2010

2011-2015

2016-2020

2021-2025

2026-2030

2031-2050

Real GDP

1.2

2.2

1.9

1.8

1.4

2.3

Real consumption

3.1

2.3

2.2

1.5

1.4

2.3

Productivity

0.1

1.0

0.7

1.2

1.2

1.9

Employment

1.0

1.1

1.1

0.6

0.2

0.4

Unemployment rate (%, end of period)

8.0

6.9

6.2

5.5

5.5

5.0

Wages

2.9

3.1

2.5

2.8

3.3

3.4

Inflation (%)

1.7

1.7

1.8

2.0

2.0

2.0

Policy interest rate (%, end of period) (1)

1.0

0.5

1.8

2.3

2.3

3.3

Ten-year government bond yield (%, end of period) (2)

3.1

1.4

1.8

3.0

3.0

4.3

Government budget balance (% of GDP, average over period)

-1.0

-1.4

-0.7

-1.2

-2.3

-3.3

Gross government debt (% of GDP, average over period)

73

86

90

87

79

78

Current account (% of GDP, average over period)

-0.9

-3.1

-3.0

-2.7

-2.7

-3.3

Exchange rate (Canadian dollar per US dollar, end of period)

0.99

1.39

1.27

1.30

1.29

1.27

Nominal GDP ($bn, end of period)

1,677

1,433

1,848

2,174

2,418

6,183

Population (millions, end of period)

34

36

38

39

41

45

Sources: Refinitiv, UN, Capital Economics


Australia

Outperforming other advanced economies as immigration continues

  • Sustained immigration means that Australia’s labour force will keep expanding at a strong pace. Coupled with a rebound in productivity growth in line with global trends, Australia will remain the fastest-growing large advanced economy. (See Chart 49.)
  • We assume that net migration will remain around 1.0% of the population throughout our forecast horizon. That means it will be twice as high as the UN assumes by 2050. However, crude birth rates may fall from 13% now to 11% by 2050. And while the labour force participation rate may rise a little further over the coming years as more women enter the labour market, the ageing of the population should result in a renewed fall in the participation rate. (See Chart 50.) The upshot is that we expect labour force growth to slow to 1.2% by 2050.
  • During the next decade or so, we expect the unemployment rate to fall towards its natural rate of around 4%, which means that employment growth will outpace growth in the labour force a bit.
  • The fall in labour productivity in 2018 was largely driven by cyclical factors. Indeed, the longer-term track record is more encouraging: productivity growth has been higher since the turn of the millennium than in other large advanced economies. We expect the global resurgence in technological progress to lift productivity growth further from just under 1% in recent years towards 1.7% over the coming two decades. The upshot is that potential growth should strengthen to around 3% over the coming three decades. (See Chart 51.)
  • Stronger productivity growth should lift the neutral interest rate from 3.25% now to around 3.75% during the late-2030s. And it should provide a boost to wage growth from the current subdued rates of around 2% per annum towards 4% by the end of the next decade. However, the high level of household debt relative to income means that the Reserve Bank of Australia will only be able to normalise policy gradually. Indeed, we expect the policy rate to remain below its neutral level for at least another decade.
  • The structural slowdown in China’s economy means that Australia’s economy will probably start to shift away from mining. Agricultural output should fall as climate change leads to more frequent and severe dry spells. And the end of the mining and housing booms means that construction will account for a smaller share of output. (See Chart 52.) The winners will probably be finance, education and health.
  • We expect the combined deficit of federal and state governments to settle at around 0.5% of GDP throughout our forecast horizon. That’s small enough for the combined debt of the federal and state governments to fall from around 40% of GDP now to below 20% over the coming three decades. This would be one of the lowest levels among advanced economies and explains why we expect long-term interest rates to rise less sharply in Australia than elsewhere.
  • The end of the resource boom may mean that the current account will return into deficit. We expect the shortfall to reach 2% of GDP by 2050.

Australia Charts

Chart 49: Real GDP Growth (2019-2050, %)

Chart 50: Labour Force Participation Rate (%)

Chart 51: Contributions to Annual GDP Growth (ppt)

Chart 52: Output by Sector (% of total)

Sources: Refinitiv, Capital Economics

Key Forecasts (% y/y, Averages, unless otherwise stated)

2006-2010

2011-2015

2016-2020

2021-2025

2026-2030

2031-2050

Real GDP

2.8

2.8

2.4

2.5

2.5

2.7

Real consumption

3.6

2.6

2.2

2.4

2.5

2.7

Productivity

0.6

1.5

0.2

0.6

1.1

1.7

Employment

2.22.11.71.31.31.3

Unemployment rate (%, end of period)

5.26.15.54.63.94.0

Wages

3.9

3.0

2.1

2.7

3.3

4.2

Inflation (%)

3.0

2.3

1.6

1.8

2.0

2.5

Policy interest rate (%, end of period) (1)

4.8

2.0

0.31.0

2.5

3.8

Ten-year government bond yield (%, end of period) (2)

5.5

2.90.51.33.0

4.5

Government budget balance (% of GDP, average over period)

-1.5

-3.3

-1.2

0.2

-0.3

-0.5

Gross government debt (% of GDP, average over period)

14

31

40

34

28

20

Current account (% of GDP, average over period)

-5.1

-3.7

-1.6

2.0

-2.1

-2.3

Exchange rate (US dollar per Australian dollar, end of period)

0.86

0.90

0.71

0.68

0.65

0.60

Nominal GDP ($bn, end of period)

1,395

1,194

1,313

1,640

1,950

4,946

Population (millions, end of period)

22

24

26

27

29

35

Sources: Refinitiv, Capital Economics


China

From growth star to middle-of-the-road EM

  • China’s economy faces structural headwinds from slowing productivity gains and a shrinking labour force. With policymakers showing little appetite for the reforms needed to boost productivity growth, we expect the trend rate of economic growth in China to more than halve over the decades ahead.
  • China’s public capital stock per capita is above what even the most investment-intensive economies have sustained at similar income levels. (See Chart 53.) Front-loading of infrastructure building has propped up growth in recent years but is generating diminishing returns and cannot be continued indefinitely.
  • Other forms of investment won’t pick up the slack. Slowing urban household formation means that fewer homes will need to be built each year. And with China’s share of global exports unlikely to rise much further, the manufacturing sector will be unable to continue adding factories at the same rate as in the past without creating overcapacity.
  • China’s shrinking pool of labour will become an increasing headwind to growth. (See Chart 54.) Attempts to boost the birth rate in recent years have so far had little effect. And China is too big to lean heavily on immigration to supplement its workforce. We expect the drag from this to peak slightly above 1%-pt in the 2030s.
  • Policymakers could counter these drags through market-based reforms to boost productivity growth. But policy under President Xi has favoured tightening political control and cementing the role of state firms, which means that resource allocation is likely to become less efficient.
  • China’s rising debt burden is also a major barrier to reform since there is a growing risk of financial instability if state support were withdrawn. In theory, the government could provide a temporary back-stop while the financial system adjusted to a new policy regime. But a smooth transition to market pricing of credit risks will be increasingly challenging to pull off.
  • Most likely, the financial system will continue to direct a disproportionate amount of credit to favoured firms. This will worsen resource allocation and drag productivity growth down further.
  • Climate change may also become a growing headwind, as rising sea levels threaten China’s heavily populated coastal cities and rising temperatures lead to a higher incidence of disease. The World Bank estimates that a 3˚C temperature rise would drag China’s GDP growth down by a 1%-pt.
  • All told, we think China’s growth rate will slow from around 5% currently (on our estimates) to about 2% from 2030 onwards. (See Chart 55.) In other words, China will fall off the path of rapid development laid down by Japan, Korea and Taiwan. Instead, it will start to resemble most middle-income EMs which have converged with developed economies at a much slower pace, if at all. (See Chart 56.)
  • But the renminbi may not follow the path of the “average” EM currency, which typically depreciates in nominal terms due to high inflation. In China’s case, continued overinvestment should keep inflation low and a small but persistent current account surplus means that the renminbi is more likely to strengthen than weaken.

China Charts

Chart 53: Public Capital Stock vs Income Level

(US$ th, 2011 prices, PPP adjusted, latest=2017)

Chart 54: Employment

Chart 55: Labour Productivity & GDP

(% y/y)

Chart 56: GDP per Capita

(% of US level, current US$, log scale)

Sources: Refinitiv, CEIC, Penn World Tables, Capital Economics

Key Forecasts (% y/y, Averages, unless otherwise stated)

2006-2010

2011-2015

2016-2020

2021-2025

2026-2030

2031-2050

Real GDP

10.7

6.3

5.2

3.6

3.2

2.2

Real consumption

9.9

8.1

7.3

4.5

4.0

3.0

Productivity

10.3

5.9

5.3

3.8

3.4

2.7

Employment

0.4

0.4

-0.1

-0.1

-0.2

-0.4

Unemployment rate (%, end of period)

5.1

5.1

5.2

5.0

5.0

5.0

Wages

15.2

11.2

7.5

6.0

5.5

4.7

Inflation (%)

3.0

2.8

2.4

1.9

2.0

2.0

Policy interest rate (%, end of period) (1)

0.0

2.3

1.8

2.5

3.0

3.0

Ten-year government bond yield (%, end of period) (2)

3.9

2.9

2.4

3.5

3.5

3.5

Government budget balance (% of GDP, average over period)

-0.6

-1.0

-4.3

-3.8

-3.1

-3.0

Gross government debt (% of GDP, average over period)

30

37

49

53

57

62

Current account (% of GDP, average over period)

7.2

2.2

1.2

1.5

1.9

2.0

Exchange rate (RMB per US dollar, end of period)

6.6

6.5

7.5

7.2

7.0

6.5

Nominal GDP ($bn, end of period)

6,087

11,016

12,926

19,531

26,198

64,546

Population (millions, end of period)

1,338

1,371

1,439

1,458

1,464

1,402

*based on CE China Activity Proxy; (1) Urban surveyed rate; (2) PBOC 7-day reverse repo rate; (3) Local currency


India

Global outperformance backed by demographics and reform

  • We expect India to sustain growth of between 5-7% per year over the next three decades, making it the fastest-growing major economy in the world. As a result, its share of world GDP should more than triple by 2050.
  • Employment growth will hold up relatively well for two reasons. First, the expansion in the working-age population is set to continue, with India replacing China as home to the world’s largest labour force by 2025. (See Chart 57.)
  • Second, female employment is likely to increase from its current very low levels. (See Chart 58.) India’s low female participation rate is often attributed to entrenched cultural norms. But we think it instead reflects a historic failure to implement labour market reforms and develop the strong manufacturing base that has been the gateway for women in poor countries to enter formal employment.
  • Labour market reform will probably continue to be sluggish in the near term, but some of India’s more progressive states – such as Rajasthan – have been rolling out reforms to ease the process of hiring and firing workers and reduce trade union power. Such reforms should eventually spread to other states and influence policymaking by the central government.
  • Other productivity-boosting measures are also likely. Prime Minister Modi’s BJP secured the largest single-party majority in the Lok Sabha (lower house of parliament) since the early 1980s in the 2019 general election (see Chart 59), which should lay the platform for continued gradual reform. Further ahead, growing pressure from businesses and investors should ensure that politicians continue to make reform progress regardless of who holds power.
  • Our optimism about long-run productivity prospects is also underpinned by structural factors. India’s low per capita income means it has the potential to deepen its capital stock, shift the labour force from low- to high-productivity sectors, and replicate the best practices of richer economies. India should also benefit from high savings and investment rates.
  • But the outlook is not universally upbeat. The recent pursuit of populist policies – such as the controversial citizenship amendment bill – is a concern and, further ahead, India will be among the worst-affected major nations from climate change. Extreme heat will weigh on worker productivity, while rising sea levels will reduce land use in coastal areas.
  • The combined central and state budget deficits will remain fairly high, but public debt is unlikely to jump sharply as a share of GDP due to the economy’s rapid growth rate.
  • The broad trend is that inflation typically falls as emerging economies converge with advanced economies. We suspect that the RBI will reduce its inflation target over time, as central banks in many wealthier EMs have done.
  • India is likely to run a small but permanent current account deficit over the long term. After all, domestic investment is likely to remain higher than domestic savings given the government’s tendency to run a budget deficit.
  • The real exchange rate is likely to continue appreciating due to strong productivity gains. And given structurally lower rates of inflation now, the pace of depreciation in the nominal rupee exchange against the US dollar will be slower than it has been over the past couple of decades. (See Chart 60.)

India Charts

Chart 57: Working-age Population (Millions)

Chart 58: Female Labour Force Participation (%, 2018)

Chart 59: Lok Sabha Election Results
(% of Seats Won by Leading Party)

Chart 60: Rupee vs US$

Sources: Refinitiv, UN, Electoral Commission, Capital Economics

Key Forecasts (% y/y, Averages, unless otherwise stated)

2006-2010

2011-2015

2016-2020

2021-2025

2026-2030

2031-2050

Real GDP

8.3

6.5

6.7

6.9

6.0

5.2

Real consumption

8.1

7.3

7.3

7.3

7.8

6.7

Productivity

8.2

5.2

5.1

5.1

4.5

3.9

Employment

0.1

1.3

1.6

1.5

1.4

1.2

Inflation (%)

8.7

8.2

4.3

4.1

4.0

3.7

Policy interest rate (%, end of period) (1)

6.3

6.8

5.3

6.0

6.0

5.0

Ten-year government bond yield (%, end of period) (2)

8.0

8.1

7.5

6.5

6.5

5.5

Government budget balance (% of GDP, average over period)

-7.6

-7.4

-6.6

-6.2

-5.3

-4.7

Gross government debt (% of GDP, average over period)

72

68

68

68

62

58

Current account (% of GDP, average over period)

-2.0

-2.9

-1.6

-1.8

-1.7

-1.5

Exchange rate (Indian rupee per US dollar, end of period)

46

64

74

79

83

101

Nominal GDP ($bn, end of period)

1,708

2,087

2,645

4,861

7,516

34,973

Population (millions, end of period)

1,234

1,310

1,383

1,445

1,504

1,639

Sources: UN, CEIC, Refinitiv, Bloomberg, Capital Economics


Other Emerging Asia

Suffering more than most from deglobalisation

  • A combination of weaker workforce growth growth, deglobalisation and reduced scope for catch-up means that growth in Emerging Asia (excluding India and China) is likely to slow in the coming decades.
  • Whereas 10 years ago working-age populations were growing by between 1-3% a year, they are now stagnant or falling in around half of the countries we cover. The UN forecasts that working-age population growth will continue to slow. (See Charts 61 & 62.) Policymakers have taken measures to boost fertility and encourage more women into the labour force. But these steps are proving ineffective and international experience suggests it will be difficult to engineer a big turnaround.
  • In the Newly Industrialised Economies (NIEs – Hong Kong, Singapore, Taiwan and Korea) a further drag has come from slower productivity growth. (See Chart 63.) The slowdown partly reflects less scope for catch-up now that these economies are amongst the most developed in the world. Although innovations in robotics and developments in AI may boost productivity growth over the coming years, falling working-age populations mean that the sustainable rate of growth in the NIEs is set to fall.
  • Countries in South and South East Asia have the potential to rack up rapid rates of productivity growth. We are especially optimistic about Vietnam, which has come closer to replicating the success of China than any other country. Several factors account for Vietnam’s strong performance, including political stability, steady progress on reform, low wages, an expanding workforce and its close proximity to the supply chains of southern China.
  • However, low-income countries are not guaranteed rapid catch-up growth. If an economy is poor today, it is probably due in large part to institutional failure. If institutions remain weak and policymaking stays counterproductive (see Chart 65), then potential development may continue to be squandered. Meanwhile, deglobalisation could cut off a key route to development in the Asian economies, which are particularly open and have relied on their role in global supply chains.
  • Growth is likely to remain relatively strong in Indonesia and the Philippines. But further reforms to free-up inflexible labour markets (Indonesia) and improve dreadful infrastructure (both) are needed if either countries are to fulfil their potential. (See Charts 66 & 67.)
  • Meanwhile, in Thailand, years of political uncertainty and upheaval have taken a toll on the country’s institutions and led to a slump in investment. Accordingly, growth there is likely to disappoint. Political uncertainty is also a big concern in Pakistan and Sri Lanka.
  • South East Asia and parts of South Asia are vulnerable to climate change. The biggest threat comes from rising sea levels, with Vietnam, Thailand and Bangladesh likely to be worst affected. (See Chart 68.) Some countries, most notably Singapore (which is planning a massive investment in its sea wall defences), have plans to deal with rising sea levels. Most other countries lack the fiscal resources to build effective defences and are likely to be hit hard by rising global temperatures.
  • Overall, we think regional growth will slow from around 4.0% today to around 3.5% in a decade’s time. While growth of this rate would still make Emerging Asia one of the fastest growing parts of the world economy, it would also mean that incomes will converge more slowly than previously. What’s more, compared to what others are forecasting, we are painting a downbeat picture.

Other Emerging Asia Charts

Chart 61: Working-age Populations (% y/y)

Chart 62: Projected Annual Change in Working-age Population (%, annual average)

Chart 63: Labour Productivity Growth in NIEs * (%, annual average)

Chart 64: Productivity Growth & GDP per capita

Chart 65: Average Severance Pay for Making Worker Redundant (no. of weeks)

Chart 66: World Bank Logistics Performance Index (higher number = better infrastructure)

Chart 67: Investment’s Share of GDP (%-point change, 2006-18)

Chart 68: Numbers Living Below High Tide by 2050 in High Emissions Scenario (% of population)

Sources: Refinitiv, UNDP, OECD, World Bank, IMF, Climate Central

Key Forecasts (% y/y, Averages, unless otherwise stated)

2006-2010

2011-2015

2016-2020

2021-2025

2026-2030

2031-2050

Emerging Asia (1)

Real GDP

5.5

4.4

4.4

3.8

3.8

3.7

Inflation (%)

4.6

5.3

3.2

2.6

2.7

2.6

Indonesia

Real GDP

6.1

5.5

5.0

4.7

4.7

4.4

Inflation (%)

7.7

5.7

3.4

3.4

3.9

3.6

Ten-year government bond yield (%, end of period) (2)

7.8

8.9

7.5

7.3

6.0

6.0

Exchange rate (Indonesian rupiah per US dollar, end of period)

8,991

13,795

14,500

14,560

15,492

18,681

Nominal GDP ($bn, end of period)

763

836

1,207

1,835

2,645

10,345

Population (millions, end of period)

243

258

267

287

299

331

Philippines

Real GDP

5.0

5.9

6.3

6.2

5.7

5.5

Inflation (%)

4.9

2.9

2.9

3.5

3.1

3.0

Ten-year government bond yield (%, end of period) (2)

7.90

4.72

5.28

5.2

4.8

4.0

Exchange rate (Philippine peso per US dollar, end of period)

44

47

53.50

55

55

56

Nominal GDP ($bn, end of period)

163

265

337

501

798

2,318

Population (millions, end of period)

94

103

110

115

122

144

South Korea

Real GDP

4.1

3.0

2.5

2.3

2.0

1.9

Inflation (%)

3.0

1.9

1.3

1.9

1.8

1.5

Ten-year government bond yield (%, end of period) (2)

4.5

2.1

2.5

3.0

3.0

4.5

Exchange rate (South Korean won per US dollar, end of period)

1,135

1,173

1,225

1,096

1,076

936

Nominal GDP ($bn, end of period)

1,115

1,334

1,538

2,180

2,688

6,041

Population (millions, end of period)

50

51

51

51

51

47

Thailand

Real GDP

3.8

3.0

3.3

2.6

2.5

2.5

Inflation (%)

3.0

2.0

0.9

1.5

1.5

2.0

Ten-year government bond yield (%, end of period) (2)

4.41

3.46

2.61

3.0

3.0

4.8

Exchange rate (Thai baht per US dollar, end of period)

30

36

30.00

29

28

25

Nominal GDP ($bn, end of period)

280

400

486

638

828

1,554

Population (millions, end of period)

67

69

70

70

70

66

Sources: IMF, Refinitiv, Capital Economics


Emerging Europe

Turkey to record fastest growth, Russia to be worst performing major EM

  • Turkey will be the region’s fastest growing economy in the coming decades, but President Erdogan’s economic policy means that the outlook will get worse before it gets better. Central and Eastern Europe will record faster growth in per capita incomes, whereas we think that Russia will be one of the worst performing EMs and income convergence is likely to stall.
  • In Russia, the next few decades will be marked by weak economic growth. Admittedly, last year’s increase to the pension age means that the demographic squeeze won’t be as bad as previously feared. (See Chart 69.)
  • However, productivity will be sluggish. Despite the country’s high savings rate, investment is low, and we think that it will remain so. The poor business environment is a deterrent for both local and foreign investors. (See Chart 70.) Vested interests mean that there are likely to be few efforts to push through structural reforms.
  • In addition, efforts to mitigate climate change are a key reason to think that real oil prices will trend down. On past form, this is consistent with sluggish economic growth in Russia. (See Chart 71.) Overall, Russia’s long-run growth prospects are among the worst in the emerging world.
  • Elsewhere, the outlook for Turkey’s economy is likely to deteriorate before it improves. The growing centralisation of power around President Erdogan means that policy will continue to drift in an unorthodox direction. The result is that inflation will probably rise (see Chart 72), the lira is likely to weaken further and vulnerabilities in the banking sector will build.
  • At the very least, Turkey’s growth path is likely to be characterised by boom and bust over the next decade. But there is a significant risk of a fresh crisis on a much larger scale than witnessed last year. This could ultimately result in the need for a bailout from the IMF and pressure for political change.
  • Over a longer horizon, Turkey is the only country in Emerging Europe where the working-age population will rise, albeit at a slower pace than previously. (See Chart 73.) But rising participation rates will offset the impact of this on growth in the labour force. Meanwhile, we’ve assumed that the authorities eventually shift tack on policy and address some of the economy’s structural issues, supporting faster productivity growth and income convergence.
  • Across Central and Eastern Europe (CEE), we expect GDP growth to hold up well in the coming decade as fiscal and monetary policy are kept loose. But this will fuel a deterioration in balance sheets and inflation will stay close to (or above) target, so currencies will depreciate.
  • Further out, CEE’s poor demographics will worsen. Unlike in Russia, there is little scope to boost the size of the labour force. Participation rates are already close to the EU average. (See Chart 74.) These countries are unlikely to turn to higher immigration to offset falling populations.
  • Large manufacturing sectors, which are heavily integrated into Western European supply chains, will drive robust productivity gains and continue to support income converge with the rest of Europe. (See Chart 75.) But this process will be much slower than in previous decades. The income gains from the reforms of the 1990s and 2000s won’t be repeated. Structural fund inflows from the EU will be smaller. (See Chart 76.) And the rise of populism and erosion of institutional quality – a particular issue in Poland and Hungary – will dampen investment.

Emerging Europe Charts

Chart 69: Russia Labour Force (Million)

Chart 70: Productivity Growth (2021-30, %)

Chart 71: Russia GDP Growth & Real Oil Prices (% y/y)

Chart 72: Consumer Price Inflation (%)

Chart 73: Annual Working-age Population Growth (%)

Chart 74: Labour Force Participation Rates (%)

Chart 75: GDP Per Capita
(% of US Level, Market Exchange Rates)

Chart 76: EU Structural Fund Inflows (% of GDP)

Sources: UN, Eurostat, Refinitiv, Capital Economics

Key Forecasts (% y/y, Averages, unless otherwise stated)

2006-2010

2011-2015

2016-2020

2021-2025

2026-2030

2031-2050

Emerging Europe

Real GDP

3.4

2.9

2.6

2.2

2.1

2.2

Inflation (%)

8.3

6.7

5.8

6.6

8.0

4.4

Russia

 

Real GDP

3.7

1.8

1.3

1.4

1.6

1.3

Inflation (%)

10.3

8.7

4.3

3.8

3.8

3.3

Ten-year government bond yield (%, end of period) (1)

7.4

9.7

6.5

6.5

6.3

5.5

Exchange rate (Russian ruble per US dollar, end of period)

31

73

67

70

76

98

Nominal GDP ($bn, end of period)

1,627

1,138

1,742

2,163

2,572

4,979

Population (millions, end of period)

143

145

146

145

143

136

Turkey

 

 

 

 

 

 

Real GDP

3.4

7.1

3.5

3.1

2.4

3.4

Inflation (%)

8.7

7.9

13.0

17.1

22.7

8.9

Ten-year government bond yield (%, end of period) (1)

8.6

10.5

16.5

23.8

26.0

7.8

Exchange rate (Turkish lira per US dollar, end of period)

1.5

2.9

7.5

15.8

50.5

206.5

Nominal GDP ($bn, end of period)

754

801

679

821

808

2,051

Population (millions, end of period)

72

79

84

87

89

97

Poland

 

 

 

 

 

 

Real GDP

4.8

3.0

4.1

2.5

2.3

2.0

Inflation (%)

2.8

1.6

1.7

2.5

2.5

2.1

Ten-year government bond yield (%, end of period) (1)

6.1

2.9

2.3

3.5

4.0

3.8

Exchange rate (Polish zloty per US dollar, end of period)

2.95

3.95

4.19

4.06

4.08

3.77

Nominal GDP ($bn, end of period)

489

456

572

751

944

2,239

Population (millions, end of period)

38.3

38.0

37.8

37.5

36.9

33.3

Czech Republic

 

 

 

 

 

Real GDP

2.5

1.7

2.9

2.5

2.4

2.0

Inflation (%)

2.8

1.5

2.1

2.0

2.0

1.7

Ten-year government bond yield (%, end of period) (1)

4.0

0.6

0.8

1.5

2.5

2.3

Exchange rate (Czech koruna per US dollar, end of period)

18.7

24.9

24.8

23.5

23.2

20.4

Nominal GDP ($bn, end of period)

212

185

236

310

390

907

Population (millions, end of period)

10.5

10.6

10.7

10.8

10.7

10.5

Sources: UN, IMF, Refinitiv, Capital Economics


Latin America

Set to suffer from climate change and slower workforce growth

  • After picking up over the next decade, growth in Latin America will slow over the first half of this century, with the region falling further behind much of the EM world.
  • The region has long benefited from a growing workforce, but this tailwind is now petering out. The UN estimates that the working-age population of Latin America will stabilise in the 2040s before starting to fall. (See Chart 77.)
  • Country-level outcomes will vary significantly. While poorer countries will probably buck the regional trend, Chile’s workforce has already peaked. Colombia and Brazil’s will begin to decline after 2030. (See Chart 78.)
  • This will leave economic growth in Brazil increasingly dependent on productivity growth, which we expect will be weak. The country has a low savings rate (see Chart 79), and so has struggled to sustain the investment needed to boost its human and physical capital. While recent pension and fiscal reforms are a step in the right direction, we think that the country will be a regional underperformer.
  • Mexico should perform somewhat better. The country has a youthful, growing population, and has succeeded in building a competitive manufacturing sector that is closely integrated into North American supply chains. This should help it to adopt new technologies and boost productivity.
  • The key problem for Mexico is that it has all of its eggs in one basket. The country is among the EMs that are most dependent on trade with a single foreign market. (See Chart 80.) A serious and sustained effort by Washington to make the American manufacturing sector more self-sufficient would upend Mexico’s economic model. Even if this does not happen, the increasing use of automated manufacturing processes may reduce the importance of low-cost labour and encourage production to relocate to consumer countries.
  • Without a dramatic improvement in macroeconomic policymaking, Argentina will continue to suffer from recurrent crises. Inflation will remain in the double digits. (See Chart 81.) Even once the macroeconomic environment stabilises, perhaps by the 2040s, the boost to potential growth will be more than offset by slower population growth.
  • Venezuela’s long-running crisis has created the potential for very rapid growth if the government (or, perhaps more likely, a new government) is able to bring inflation under control and attract new investment.
  • Further ahead, however, Venezuela will face a serious challenge in re-orientating its economy away from oil as global oil demand stabilises and eventually falls. (See Chart 82.) Colombia faces a similar challenge, though its more stable economy and investor-friendly government leave it more able to plan for such a transition. As tropical economies, both countries are likely to be harder hit by rising temperatures than more temperate countries further South.
  • We’re more optimistic about Chile and Peru. Both countries stand to gain if the widespread adoption of electric vehicles boosts demand for their copper and cobalt exports. (See Chart 83.) Chile’s shrinking workforce, however, will provide an economic drag. We think that Peru, with its youthful population is likely to be a key outperformer.
  • One upside risk for the regional forecast is the potential for further economic integration within Latin America. Trade barriers are high by global standards, and past experience suggests that cutting them could boost productivity. (See Chart 84.) But with some key global economies actively de-globalising, it would be difficult for the region to swing against the current.

Latin America Charts

Chart 77: Working-age Population

Chart 78: Total Change in Working-age Population (%)

Chart 79: National Savings
(% of GDP, 2000-2018 Average)

Chart 80: Exports sent to Top Destination
(% of Total, Latest)

Chart 81: Consumer Prices (% y/y, t = peak)

Chart 82: Commodity Exports (% of GDP, 2018)

Chart 83: Chile & Peru GDP & Real Copper Prices

Chart 84: Tariff Levels (%) & Productivity Growth (% y/y)

Sources: IMF, Intracen, National Sources, Capital Economics

Key Forecasts (% y/y, Averages, unless otherwise stated)

2006-2010

2011-2015

2016-2020

2021-2025

2026-2030

2031-2050

Latin America

Real GDP

3.7

2.3

1.1

2.5

2.4

2.0

Inflation (%)

4.9

5.1

7.6

6.3

4.1

3.4

Argentina

Real GDP

5.1

1.5

-0.9

2.1

2.3

1.7

Inflation (%)

18.4

27.5

40.8

18.6

11.4

5.5

Ten-year government bond yield (%, end of period) (1)

20.0

28.3

16.5

11.0

Exchange rate (Argentine peso per US dollar, end of period)

4

11

90

143

238

497

Nominal GDP ($bn, end of period)

418

523

446

577

666

1315

Population (millions, end of period)

41

43

46

47

49

55

Brazil

Real GDP

4.5

1.2

0.4

2.2

2.1

1.8

Inflation (%)

4.7

6.7

4.7

3.5

3.5

3.1

Ten-year government bond yield (%, end of period) (1)

12.4

16.5

7.0

7.3

7.3

6.3

Exchange rate (Real per US dollar, end of period)

1.7

4.0

4.3

4.4

4.8

5.9

Nominal GDP ($bn, end of period)

2341

1516

1850

2251

2751

5866

Population (millions, end of period)

196

204

214

220

225

233

Mexico

Real GDP

1.6

3.0

1.7

2.5

2.2

1.9

Inflation (%)

4.4

3.6

4.2

3.5

3.1

3.3

Ten-year government bond yield (%, end of period) (1)

7.0

6.3

8.5

5.0

6.0

7.3

Exchange rate (Mexican peso per US dollar, end of period)

12.3

17.3

21.5

22.3

23.8

31.1

Nominal GDP ($bn, end of period)

1084

1074

1129

1543

1885

3992

Population (millions, end of period)

117.3

125.9

133.9

141.1

147.5

164.3

Colombia

Real GDP

4.5

4.7

2.3

2.3

2.0

1.4

Inflation (%)

4.7

3.3

4.5

3.1

2.6

2.1

Ten-year government bond yield (%, end of period) (1)

9.2

7.1

6.8

8.6

10.1

9.4

Exchange rate (Colombian peso per US dollar, end of period)

1920

3175

3248

4000

4351

4925

Nominal GDP ($bn, end of period)

286

293

336

361

463

817

Population (millions, end of period)

44

47

51

52

53

56

Sources: IMF, National Source, Capital Economics


Middle East & North Africa

Gulf economies will struggle to diversify away from oil

  • Favourable demographics will support robust economic growth across the Middle East and North Africa in the coming decades. But we expect incomes in the Gulf to be flat or fall relative to those in the US. In contrast, income convergence in Morocco is likely to be rapid as it carves out a position as a manufacturing hub.
  • Working-age populations will grow by an average of 1% per annum over the next 30 years. (See Chart 85.) That will be slower than in the past two decades but still among the fastest increases in the emerging world. The size of labour forces will probably rise at an even faster pace as participation rates edge up from their current low levels. (See Chart 86.)
  • The Gulf economies will remain heavily reliant on their large oil and gas sectors. But as efforts to tackle climate change are stepped up, the world is likely to shift away from a dependence on fossil fuels. We expect oil demand growth to slow and turn negative in the mid-2030s.
  • As low-cost producers, the Gulf countries will remain key players in the energy market. Oil output will probably be increased to ensure that abundant natural resources are fully utilised before they become redundant. But real oil prices are likely to trend down. (See Chart 87.)
  • Large foreign currency savings (see Chart 88) mean that dollar pegs should remain intact – Bahrain and Oman will be bailed out by their neighbours. But fiscal policy will have to be kept tight. Governments will have little scope to boost public sector employment in order to absorb rapidly rising populations. Efforts to push more nationals into work in the private sector are likely to be stepped up to prevent sharp rises in unemployment. But this will require Gulf nationals to lower their wage demands relative to migrant workers, who currently make up the bulk of private sector employees. (See Chart 89.) Overall, we think incomes in the Gulf are unlikely to converge further with those in US. (See Chart 90.)
  • The UAE’s relatively diversified economy, and limited reliance on oil for export and budget revenues, means that it is better placed to cope with lower real oil prices. We don’t think that the other Gulf countries will be able to replicate the UAE’s non-oil development over the past twenty years. Saudi Arabia’s Vision 2030 reform plans fall short in several key areas – such as tackling the poor education system – and so we don’t think that it will unlock significantly faster growth. Diversification efforts in the rest of the Gulf will be slow-going.
  • Outside of the Gulf, the trend towards more orthodox policymaking will help to improve macroeconomic stability. Balance of payments positions will be on a firmer footing and inflation should fall. Savings and investment rates are generally low, particularly in Egypt. (See Chart 91.) This reflects several factors, including crowding out and poor business environments. Policymakers are slowly addressing some of these issues, which should support higher investment and faster income convergence than over the past decade.
  • But many countries will still suffer slower catch-up growth than the best-performing EMs did at a similar stage of development. One key exception is likely to be Morocco. Reforms over the past decade are attracting significant investment into the automobiles sector, with the country on course to meet the government’s target of producing 1m cars by 2025 – putting in the same league as Italy and Slovakia. (See Chart 92.) This will boost exports, deepen supply chains and drive rapid productivity gains.

Middle East & North Africa Charts

Chart 85: Working-age Populations (% y/y, Average)

Chart 86: Participation Rates (%)

Chart 87: Oil Prices (Brent, $pb)

Chart 88: FX Reserves and Sovereign Wealth Fund Assets (Latest)

Chart 89: Ratio of Saudi to Non-Saudi Wages by Education Level (Q2 2019)

Chart 90: GDP per Capita (% of US)

Chart 91: Investment (2018, % of GDP)

Chart 92: Car Production (2018, mn)

Sources: CEIC, Refinitiv, OICA, Capital Economics

Key Forecasts (% y/y, Averages, unless otherwise stated)

2006-2010

2011-2015

2016-2020

2021-2025

2026-2030

2031-2050

Middle East & North Africa

Real GDP

4.4

4.4

1.9

2.2

2.7

3.3

Inflation (%)

5.6

3.7

2.7

2.4

2.1

2.0

Saudi Arabia

 

Real GDP

2.8

5.2

1.2

1.8

2.3

2.2

Inflation (%)

4.2

4.1

2.1

1.5

1.1

1.4

Ten-year government bond yield (%, end of period) (1) (2)

3.50

4.30

5.30

6.00

Exchange rate (Saudi riyal per US dollar, end of period)

3.75

3.75

3.75

3.75

3.75

3.75

Nominal GDP ($bn, end of period)

528

654

770

906

1081

2223

Population (millions, end of period)

27.4

31.6

34.8

37.2

39.3

44.6

Egypt

 

 

 

 

 

 

Real GDP

6.2

2.9

5.1

4.9

5.6

6.0

Inflation (%)

10.4

9.7

12.3

5.7

5.1

5.0

Ten-year government bond yield (%, end of period) (1) (3)

16.70

16.20

13.80

13.00

13.00

Exchange rate (Egyptian pound per US dollar, end of period)

5.5

7.2

19.0

23.4

26.9

43.1

Nominal GDP ($bn, end of period)

231

342

289

322

448

2864

Population (millions, end of period)

84

94

102

112

121

160

UAE

 

 

 

 

 

 

Real GDP

2.5

5.2

1.9

2.5

2.9

2.4

Inflation (%)

8.1

1.2

1.0

0.1

1.1

1.5

Ten-year government bond yield (%, end of period) (1)

3.00

4.30

4.90

5.80

Exchange rate (UAE dirham per US dollar, end of period)

3.67

3.67

3.67

3.67

3.67

3.67

Nominal GDP ($bn, end of period)

290

358

422

481

586

1242

Population (millions, end of period)

8.3

9.2

9.9

10.3

10.7

10.4

Morocco

 

 

 

 

 

Real GDP

5.0

4.0

2.9

3.6

5.1

5.6

Inflation (%)

2.2

1.1

1.3

2.3

2.4

3.0

Ten-year government bond yield (%, end of period) (1) (4)

5.50

5.80

8.90

8.20

Exchange rate (Moroccan dirham per US dollar, end of period)

7.9

9.1

9.8

9.8

9.6

8.9

Nominal GDP ($bn, end of period)

99

109

124

166

243

1365

Population (millions, end of period)

32.4

34.8

36.9

39.0

40.9

46.2

Sources: CEIC, Refinitiv, Capital Economics


Sub-Saharan Africa

Weak institutions and climate change to keep Africa poor

  • Although Sub-Saharan Africa (SSA) will probably experience rapid economic growth over the coming decades, it will remain the poorest region of the world. Indeed, it is likely to fall further behind other low-income regions.
  • Demographic change in SSA will take place on a scale exceeding that elsewhere in the world. High birth rates suggest the region’s population will overtake those of China and India by the middle of the century. (See Chart 91.) Indeed, over half of the new working-age people added to the global population over this period will be in Africa. (See Chart 92.)
  • But while populations across most of Sub-Saharan Africa are rising quickly, the region is experiencing a very slow demographic transition – the process during which falling birth rates increase the share of the population that is of working-age thus boosting savings and productivity. This transition was crucial in boosting economic output in Asian economies since the 1970s.
  • Even by 2050, SSA will have a relatively large number, meaning that a smaller share of the population will be of working age than the share in India or Latin America. (See Chart 93.) Since working-age Africans will have so many children to support they will not have much scope to save. Low savings will keep a lid on investment and depress productivity potential.
  • Indeed, we expect that productivity growth across Sub-Saharan Africa will remain weak over the coming decades. For one thing, investment rates across the region are already much lower than in emerging market peers. Given weak institutions and a lack of integration within Africa, there is little chance of a rapid, dramatic reform process of the kind that boosted growth in China and India. It is also unclear whether low-skilled, labour-intensive manufacturing – which provided Asian economies with their first step on the development ladder – will still exist in the 2030s and 40s, since automated systems may have reduced the importance of cheap human labour. Admittedly, we still expect productivity growth to pick up gradually due to the diffusion of new technologies. But it will be slower than in other emerging markets. (See Chart 94.)
  • Weak productivity will limit income growth. Indeed, we expect that SSA will be increasingly left behind by other low-income regions. (See Chart 95.) The World Bank estimates that, by 2030, 90% of the people still living below the poverty line will be African.
  • Within SSA, the coming decades will probably see a significant rebalancing of the economy away from South Africa and towards Nigeria and the East African economies. We expect Nigeria’s GDP to be more than twice as large as South Africa’s by 2050. (See Chart 96.)
  • That said, our relatively optimistic Nigerian forecast assumes that the country is able to rebalance its economy away from oil as demand flatlines and then falls towards the middle of the century. This challenge will be even more daunting in Angola, which has few non-oil industries and which we expect to experience severe relative decline. Mining economies in Central Africa, by contrast, stand to gain if the increased use of electric vehicles boosts demand for copper, cobalt, and other minerals. (See Chart 97.)
  • As tropical countries with large agricultural sectors, SSA faces the biggest costs from climate change. Productivity in the sector – which is the region’s largest employer – could fall by 10% if average global temperatures rise by 3°C. (See Chart 98.)

Sub-Saharan Africa Charts

Chart 91: Population (mn)

Chart 92: Increase in Working-age Population
(2020 to 2050, Millions)

Chart 93: Working-age Population
(% of Total Population)

Chart 94: GDP Growth (% y/y & Contribution)

Chart 95: GDP per Capita (2020 PPP)

Chart 96: GDP (US$bn, Nominal)

Chart 97: Commodity Exports
(% of GDP, 2019)

Chart 98: Change in Agricultural Productivity by Increase in Global Temperature (%)

Sources: UN, IMF, National Sources, Capital Economics

Key Forecasts (% y/y, Averages, unless otherwise stated)

2006-2010

2011-2015

2016-2020

2021-2025

2026-2030

2031-2050

Sub-Saharan Africa

Real GDP

5.9

4.7

2.6

3.4

4.8

5.4

Inflation (%)

8.7

7.7

9.4

8.0

7.0

6.4

Nigeria

Real GDP

8.2

4.8

1.1

3.1

4.7

5.2

Inflation (%)

10.3

9.7

12.8

10.0

9.6

8.6

Ten-year government bond yield (%, end of period) (1)

8.3

11.1

14.0

17.8

16.0

14.0

Exchange rate (Nigerian naira per US dollar, end of period)

151

196

390

476

706

2603

Nominal GDP ($bn, end of period)

367

487

391

680

914

3,541

Population (millions, end of period)

159

181

206

234

264

411

South Africa

Real GDP

3.1

2.2

0.7

1.7

1.9

2.0

Inflation (%)

6.8

5.4

5.1

5.7

4.6

3.1

Ten-year government bond yield (%, end of period) (1)

8.1

9.8

8.0

8.3

7.3

7.3

Exchange rate (South African rand per US dollar, end of period)

6.8

14.9

16.3

19.9

22.8

29.0

Nominal GDP ($bn, end of period)

402

271

328

383

459

974

Population (millions, end of period)

52

55

59

62

64

73

Angola

Real GDP

8.5

4.5

-0.8

2.3

-2.2

0.5

Inflation (%)

13.2

9.8

25.2

15.9

10.3

8.0

Ten-year government bond yield (%, end of period) (1)

Exchange rate (Angolan kwanza per US dollar, end of period)

92

121

425

534

836

2880

Nominal GDP ($bn, end of period)

84

116

106

202

195

315

Population (millions, end of period)

23

28

33

38

45

77

Kenya

Real GDP

5.0

5.5

5.8

5.6

5.5

5.0

Inflation (%)

8.1

8.5

5.8

5.1

4.6

4.1

Ten-year government bond yield (%, end of period) (1)

11.2

13.8

12.9

11.9

11.0

9.4

Exchange rate (Kenyan shilling per US dollar, end of period)

79

98

110

126

141

196

Nominal GDP ($bn, end of period)

40

64

101

147

215

908

Population (millions, end of period)

42

48

54

60

66

92

Sources: IMF, National Sources, Capital Economics


Commodities

The sun is slowly setting on oil

  • Subdued global economic growth and rapidly rising fuel efficiency mean that growth in demand for oil will slow over the next decade. What’s more, we think demand will peak in the 2030s and fall thereafter (see Chart 99), owing to the ongoing electrification of the transport sector, subdued growth in global trade and concerns about the impact of fossil fuel use on climate change. At the same time, plentiful oil reserves mean that supply should be ample. As a result, we expect real oil prices to trend down from the early 2020s to 2050. (See Chart 100.)
  • Global oil use has been rising by an annual average of around 1.3% since 2000. But markedly slower growth is likely in the 2020s as lighter materials and advances in engine technology lead to greater fuel efficiency in all forms of transport.
  • In addition, we expect rapid growth (admittedly from a low base) in electric, and other types of alternatively-fuelled, vehicles. This should more than offset the positive impact on oil demand of growth in transport sectors in emerging markets in 2020-50.
  • Soft global economic growth will also weigh on oil demand. This is particularly the case as future economic growth is likely to be driven more by services and technology, which will not necessarily result in a proportionate increase in oil demand. (See Chart 99 again.) The upshot is that we expect global oil demand to peak at just under 115m bpd in 2035, up from around 100m bpd now.
  • There is more than enough oil in reserves to meet this level of demand. In the next decade, we expect steady increases in shale oil production in the US. Supply will become more responsive and OPEC will continue to lose its pricing power.
  • However, in the second half of our forecast period, we see the re-emergence of OPEC, and especially the Gulf producers, as the principal source of supply. As they are by far the lowest-cost suppliers, the Gulf countries will be able to continue to produce even within a world of falling demand and real prices. Moreover, these countries will be keen to ramp up output to prevent oil reserves being left in the ground.
  • Declining demand, ample output and lower marginal costs should all put downward pressure on oil prices. We estimate that the real price of Brent will fall to $45 per barrel (in 2018 prices) by 2050, down from around $60 today.
  • In contrast, we think growth in the green economy will support global demand for copper over the forecast period and more than offset the negative impact of slower, and more services-intensive, growth in China (the largest consumer by far). Both renewable energy and electric vehicles are copper intensive. At the same time, the current project pipeline for copper mine supply looks thin, pointing to higher prices over the next decade. In the longer term, supply should pick up to meet demand and real copper prices will start to ease back. (See Chart 101.)
  • The long-term outlook for agricultural commodity prices is particularly uncertain, given that climate change may have an adverse effect on global production. Our forecast for wheat assumes a somewhat lower level of supply growth, but this is at least in part due to softer growth in demand.
  • Slower global population growth and rising real incomes are likely to lead to only sluggish growth in demand for staple foods, such as wheat. (See Chart 102.) From the mid-2020s, we expect real wheat prices to fall.

Commodities Charts

Chart 99: GDP & Oil Demand (% y/y)

Chart 100: Real & Nominal Oil Prices (Brent, $ per Barrel)

Chart 101: Copper Market Balance &
Real Copper Price

Chart 102: Global Wheat Consumption &
Real Wheat Price

Sources: Refinitiv, Bloomberg, BP, Capital Economics

Key Forecasts (Averages, unless otherwise stated)

2006-2010

2011-2015

2016-2020

2021-2025

2026-2030

2031-2050

Oil

Nominal oil price ($ per barrel)

75

97

60

70

68

80

Real oil price ($ per barrel)

101

109

59

62

54

47

Nominal oil price (% y/y)

11.5

-3.7

5.1

1.5

0.0

1.7

Real oil price (% y/y)

8.4

-6.1

2.7

-0.9

-2.3

-0.6

Copper

Nominal copper price ($ per tonne)

6,712

7,295

5,920

8,150

9,510

10,870

Real copper price ($ per tonne)

8,487

8,168

5,910

7,200

7,540

6,430

Nominal copper price (% y/y)

21.3

-5.4

2.9

9.5

-1.1

1.9

Real copper price (% y/y)

18.2

-7.7

0.5

7.0

-3.3

-0.4

Wheat

Nominal wheat price (US cents per bushel)

589

648

467

480

540

640

Real wheat price (US cents per bushel)

742

725

467

440

430

380

Nominal wheat price (% y/y)

17.2

-1.7

-0.7

1.7

0.9

1.8

Real wheat price (% y/y)

14.0

-4.2

-3.1

-0.6

-1.4

-0.5

Sources: BP, Refinitiv, Capital Economics


Ten Risks to the Global Outlook


Rankings

Table 2: World Rankings by Nominal GDP at Market Exchange Rates

Ranked by Nominal GDP
($bn, end of period)

Country

Nominal GDP

($bn, 2050)

Nominal GDP
Per Capita

($, 2050)

Nominal GDP
Per Capita

(% of US, 2050)

Real GDP

(% y/y, Average 2031-2050)

2018

2050

Top 15

1

1

United States

75,179

192,968

100

2.4

2

2

China

64,142

45,737

24

2.2

7

3

India

34,831

21,249

11

5.2

3

4

Japan

11,519

104,001

54

0.6

16

5

Indonesia

10,261

31,009

16

4.4

4

6

Germany

10,145

122,709

64

1.5

5

7

United Kingdom

9,290

125,405

65

1.7

6

8

France

7,514

107,112

56

1.6

10

9

Canada

6,183

137,567

71

2.3

12

10

South Korea

6,001

128,135

66

1.9

9

11

Brazil

5,866

25,208

13

1.8

11

12

Russia

4,979

37,512

19

1.3

14

13

Australia

4,950

140,559

73

2.7

26

14

Philippines

4,479

31,001

16

5.5

8

15

Italy

4,015

72,872

38

0.7

Selected Other Economies

Mexico

3,989

24,280

13

1.9

Nigeria

3,541

8,622

4

5.2

Spain

3,513

79,128

41

1.4

Thailand

2,370

35,935

19

2.5

Egypt

2,277

14,838

8

6.0

Poland

2,239

67,236

35

2.0

Saudi Arabia

2,223

49,347

26

2.2

Turkey

2,051

21,118

11

3.4

Morocco

1,346

29,160

15

5.6

Argentina

1,316

23,831

12

1.7

UAE

1,242

119,137

62

2.4

South Africa

943

12,955

7

2.0

Czech Republic

911

86,426

45

2.0

Colombia

896

16,017

8

1.4

Kenya

832

9,086

5

5.0

Angola

186

2,407

1

0.5

Sources: Refinitiv, United Nations, Capital Economics


Detailed Forecasts

Table 3: Population (End of period, millions)

2006-2010

2011-2015

2016-2020

2021-2025

2026-2030

2031-2050

Advanced Economies

US

309

321

331

343

355

390

Japan

128

127

127

125

123

111

Euro-zone

– Germany

82

82

83

84

84

83

– France

63

64

65

66

67

70

– Italy

59

61

59

59

58

55

– Spain

47

46

46

46

46

44

UK

63

65

68

69

70

74

Canada

34

36

38

39

41

45

Australia

22

24

26

27

29

35

Emerging Asia

China

1,338

1,371

1,439

1,458

1,464

1,402

India

1,231

1,309

1,383

1,445

1,504

1,639

Indonesia

243

258

274

287

299

331

S. Korea

50

51

51

51

51

47

Thailand

67

69

70

70

70

66

Philippines

94

103

110

117

124

144

Emerging Europe

Russia

143

144

144

143

141

133

Turkey

72

79

84

87

89

97

Poland

38

38

38

38

37

33

Czech Republic

10.5

10.6

10.7

10.8

10.7

10.5

Latin America

Brazil

196

204

214

220

225

233

Mexico

117

126

134

141

148

164

Argentina

41

43

46

47

49

55

Colombia

44

47

51

52

53

56

MENA

Saudi Arabia

27

32

35

37

39

45

Egypt

83

92

103

111

120

153

UAE

8

9

10

10

11

10

Morocco

32

34

37

39

41

46

Sub-Saharan Africa

Nigeria

159

181

206

234

264

411

South Africa

52

55

59

62

64

73

Angola

23

28

33

38

45

77

Kenya

42

48

54

60

66

92

Sources: UN, Capital Economics

Detailed Forecasts

Table 4: Productivity (% y/y, Average)

2006-2010

2011-2015

2016-2020

2021-2025

2026-2030

2031-2050

Advanced Economies

US

1.3

0.8

0.9

1.4

1.8

2.0

Japan

0.3

0.7

-0.3

0.4

1.0

1.5

Euro-zone

 

– Germany

0.3

0.8

0.3

0.9

1.4

1.7

– France

0.4

0.6

0.6

0.7

1.1

1.4

– Italy

-0.4

-0.6

0.2

0.5

0.5

1.0

– Spain

1.5

0.9

0.0

-0.3

0.5

1.2

UK

0.2

0.6

0.4

1.1

1.1

1.5

Canada

0.1

1.0

0.7

1.2

1.2

1.9

Australia

0.6

1.5

0.2

0.7

1.1

1.7

 

Emerging Asia

 

China

10.3

5.9

5.3

4.1

3.7

2.7

India

8.2

5.2

5.1

5.1

4.5

3.9

Indonesia

3.1

4.3

2.4

3.0

3.4

3.6

S. Korea

3.1

1.3

1.9

1.9

2.0

2.3

Thailand

3.0

2.7

3.2

2.9

3.2

3.5

Philippines

2.4

3.8

4.5

4.6

4.2

4.7

 

Emerging Europe

 

Russia

3.4

0.7

1.2

1.6

1.5

1.6

Turkey

1.1

3.0

1.5

1.6

1.6

2.4

Poland

4.5

3.7

5.2

3.4

2.8

3.0

Czech Republic

2.2

2.6

3.5

2.6

2.5

2.6

 

Latin America

 

Brazil

2.8

-0.3

-0.3

1.4

1.5

1.7

Mexico

-0.3

1.1

-0.2

0.7

1.0

1.5

Argentina

2.4

0.1

-0.6

0.5

0.5

1.3

Colombia

2.6

3.2

0.6

1.4

1.0

1.0

 

MENA

 

Saudi Arabia

-0.9

-0.2

0.1

0.3

1.1

1.7

Egypt

1.8

3.3

1.2

2.3

3.3

4.7

UAE

0.5

3.7

0.8

1.0

1.2

1.5

Morocco

-1.5

-1.6

1.1

2.3

4.1

5.9

 

Sub-Saharan Africa

 

Nigeria

5.1

2.9

-1.6

-0.1

1.7

2.5

South Africa

2.6

-0.4

0.0

0.5

0.5

1.0

Angola

4.7

0.9

-4.5

-1.4

-5.8

-2.7

Kenya

2.0

2.2

2.6

2.5

2.9

3.1

Sources: Refinitiv, Capital Economics

Detailed Forecasts

Table 5: Inflation (%, Average)

2006-2010

2011-2015

2016-2020

2021-2025

2026-2030

2031-2050

Advanced Economies

US

2.2

1.7

1.9

1.9

1.7

1.9

Japan

-0.1

0.7

0.5

0.5

0.5

0.5

Euro-zone

 

– Germany

1.6

1.5

1.3

1.4

1.5

1.5

– France

1.7

1.2

1.2

1.4

1.5

1.6

– Italy

2.0

1.6

0.8

0.8

0.9

1.4

– Spain

2.5

1.2

1.2

1.2

1.2

1.4

UK

2.7

2.3

1.8

1.9

2.0

2.0

Canada

1.7

1.7

1.8

2.0

2.0

2.0

Australia

3.0

2.3

1.6

1.8

2.0

2.5

 

Emerging Asia

 

China

3.0

2.82

2.4

1.9

2.0

2.0

India

8.7

8.2

4.4

4.2

4.0

3.7

Indonesia

7.7

5.7

3.4

3.5

3.9

3.6

S. Korea

3.0

1.9

1.2

1.9

1.8

1.5

Thailand

3.0

2.0

0.7

1.5

1.5

2.0

Philippines

4.9

2.9

2.9

3.5

3.1

3.0

 

Emerging Europe

 

Russia

10.3

8.7

4.3

3.8

3.8

3.3

Turkey

8.7

7.9

13.0

17.1

22.7

8.9

Poland

2.8

1.6

1.7

2.5

2.5

2.1

Czech Republic

2.8

1.5

2.1

2.1

2.0

1.7

 

Latin America

 

Brazil

4.7

6.7

4.7

3.5

3.5

3.1

Mexico

4.4

3.6

4.1

3.5

3.1

3.3

Argentina

44.8

18.6

11.4

5.5

Colombia

4.7

3.3

4.5

3.2

2.6

2.1

 

MENA

 

Saudi Arabia

5.3

3.2

0.7

1.5

1.1

1.4

Egypt

11.5

9.5

14.7

5.7

5.1

5.0

UAE

8.1

1.2

1.0

0.1

1.1

1.5

Morocco

2.2

1.1

1.3

2.3

2.4

3.0

 

Sub-Saharan Africa

 

Nigeria

10.3

9.7

13.1

10.3

9.6

8.6

South Africa

6.8

5.4

5.1

5.6

4.6

3.1

Angola

13.2

9.8

25.2

15.9

10.3

8.0

Kenya

8.1

8.5

5.8

5.1

4.6

4.1

Sources: Refinitiv, Capital Economics

Detailed Forecasts

Table 6: Policy Interest Rate (%, End of Period)

2006-2010

2011-2015

2016-2020

2021-2025

2026-2030

2031-2050

Advanced Economies

US

0.3

0.5

1.8

2.0

2.0

3.0

Japan

0.1

0.1

-0.1

0.0

0.0

0.0

Euro-zone

1.0

0.1

0.0

0.3

1.0

1.0

UK

0.5

0.5

0.8

1.8

2.5

2.5

Canada

1.0

0.5

1.8

2.3

2.3

3.3

Australia

4.8

2.0

0.3

1.0

2.5

3.8

 

Emerging Asia

 

China

2.3

1.8

2.5

3.0

3.0

India

6.3

6.8

5.3

6.0

6.0

5.0

Indonesia

6.5

7.5

5.5

4.8

4.0

4.0

S. Korea

2.5

1.5

1.3

2.0

2.0

3.0

 

 

Emerging Europe

 

Russia

5.0

11.0

6.0

6.0

5.8

5.0

Turkey

8.8

14.0

18.3

20.0

6.0

 

 

Latin America

 

Brazil

10.8

14.3

4.5

5.5

5.5

4.8

Mexico

4.5

3.3

6.5

4.3

5.0

6.0

Argentina

45.0

15.0

15.0

10.0

 

MENA

 

Saudi Arabia

2.0

2.0

2.3

2.8

3.0

5.0

Egypt

8.3

9.3

10.0

7.8

7.5

7.5

 

 

Sub-Saharan Africa

 

Nigeria

6.3

11.0

13.0

12.8

11.5

10.0

South Africa

5.5

6.3

6.5

6.3

5.5

5.5

Sources: Refinitiv, Capital Economics


Jennifer McKeown, Head of Global Economics Service, +44 20 7811 3910, jennifer.mckeown@capitaleconomics.com
Simon MacAdam, Global Economist, +44 20 7808 4983, simon.macadam@capitaleconomics.com
Bethany Beckett, Assistant Economist, +44 20 7808 4052, bethany.beckett@capitaleconomics.com

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